I’ve been thinking of doing a trade on Safeway (SWY, $21.13, up $0.62) with earnings due out on Thursday before the bell. For those of you new to the blog, buying options specifically on an earnings announcement is a dangerous game but one I like to dabble in. There are times where option investors trade earnings announcements and they are usually considered “lottery” plays.

First Solar (FSLR, $112.18, down $25.50) is a prime example of just how volatile a stock can be. The stock was up $12 yesterday, down $25 today after saying 4Q earnings doubled yet their outlook was weak.

Safeway is not going to make that dramatic of a move but I do think we could get a 10% pop either way. I’m leaning towards the bearish camp because there have been a slew of downgrades on the stock and I think Safeway is going to report weaker-than-expected earnings.

Interesting enough was the volume in the March 17.50 puts (SWYOW, $0.20, down $0.05). Safeway’s options don’t usually attract a lot of attention and there appears to be a “block” trade of 400 contracts that was made earlier this morning. These puts were at 35 cents on Monday and I’ve been watching them all week. The one thing that worries me is the rally Whole Foods Market (WFMI, $12.40, down $0.06) got after it reported earnings. The stock jumped from $9 to $13 after the company pleased Wall Street with its numbers.

Having said all of that, the research I’ve done is leaning towards a lower stock price despite today’s rally in the shares. However, I don’t want to go that far out with the March 17.50 puts. Yeah, they could jump to 40 cents if Safeway tanks on Thursday but the March 20 puts (SWYOD, $0.70, down $0.20) look like a safer play.

If the stock rallies to $23-$24, then the March 20 puts might fall to 30 cents or so. However, the March 17.50 puts would probably fall to 5 or 10 cents. The options don’t expire for another month so there would be time for the stock to fall back. That would be a lot to ask for though – to rally to $24 then fall to $17. That would mean a 25% drop in a month for the stock and that is unlikely.

The bottom line is this is a lottery play. It’s like betting on black or red at the tables. I like the trade though. However, we can limit some of our exposure. By that I mean…instead of buying 10 contracts, only buy 5. If you normally do 20 or 30 block option trades, then do 10 or 15. You get the point.

You can wait and buy the puts before the closing bell as they might get cheaper with a rally. Either way, the position would be closed on Thursday, regardless of what the stock may do in the following weeks.

Rick Rouse
Rick@OptionsMentoring.com