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July 10, 2014  Thu 4:14 AM CT

SVU: SEE CHART GET CHAIN FIND STRATEGIES
Supervalu is drawing bullish option activity ahead of the grocery chain's earnings report in two weeks.

More than 5,500 October 9 calls traded for $0.40 to $0.45 yesterday, led by a print of 5,000 that was bought for $0.43, according to optionMONSTER's Heat Seeker tracking system. The volume was well above the strike's previous open interest of 1,488 contracts, showing that this is new positioning.

These long calls lock in the price where the stock can be purchased through mid-October no matter how far it might climb. They could be sold earlier at a profit if premiums rise with a rally before then, providing potentially significant leverage, but the contracts will expire worthless if shares remain below $9. (See our Education section)

SVU rose 0.85 percent yesterday to close at $8.32. The stock has been trending higher since hitting a 52-week low of $5.38 in early February, and it is now back near its 52-week high of $8.76 reached last October.

Total option volume in Supervalu topped 6,800 yesterday, 5 times its daily average for the last month. Only 50 of those contracts were puts, a reflection of the session's bullish sentiment.
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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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