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September 18, 2013  Wed 12:09 PM CT

SWY: SEE CHART GET CHAIN FIND STRATEGIES
Supermarkets have been in stealth-rally mode, and the bulls are shopping at Safeway today.

optionMONSTER's Heat Seeker monitoring system detected the purchase of 10,000 January 32 calls for $1.75. Equal-sized blocks were sold at the same time in the January 27 puts for $0.65 and the January 37 calls for $0.40. Volume was more than quadruple the previous open interest at all three strikes.

The trade combines a bullish call spread with put selling to produce a highly leveraged position. It cost just $0.70 to open and will expand to $5--a profit of 614 percent--if the shares close at or above $37 on expiration. (See our Education section)

SWY is down fractionally to $30.95 in afternoon trading but is up 89 percent in the last year. That makes it the strongest member of the SPDR Consumer Staples Fund during that time, according to our researchLAB market scanner. Other grocers, such as Supervalu and Kroger, have also outperformed by a wide margin in the group, whose performance is shown on the graphic below.

There was a flurry of activity in SWY yesterday, with the company adopting a poison-pill provision to avert a hostile takeover by an unidentified bidder. It's now back around the same levels where it peaked in mid-2008. The next potential resistance area on its chart is around $37 or $38 from early 2007, roughly the objective of today's complex strategy.

Total option volume in SWY is more than 4 times greater than average so far today, according to the Heat Seeker.



(Graphic courtesy of researchLAB)
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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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