The trade in Safeway (SWY, $18.54, down $2.58) is paying huge dividends this morning. I did a write-up yesterday around noon and talked about the company’s earnings with the possibility of buying put options ahead of this event. Most pros will tell you these are the riskiest of trades but I had a good feeling about this one.

My research was pointing towards a lower stock price after the company announced its profits which were due to be released before the opening bell. There were some issues that led me to believe that buying puts would be the way to go. First, the pricing wars the company is having is starting to catch-up and I felt there could be an earnings miss. Then, I looked at the stock’s past trading history around earnings and studied how the shares have traded over the past 90 days.

A lot of investors were buying the stock yesterday in anticipation of a good earnings report which allowed us to get into the trade at cheaper prices. Well, all of that research has paid off.

Wall Street was expecting the company to report a profit of $0.81/ share and they came in at $0.79. The company announced before the bell and the stock is getting absolutely crushed an hour into the trading session. The 10+% loss has meant 150%+ profits on our put options.

The March 20 puts (SWYOD, $1.80, up $1.10) are up 157% from yesterday’s close, folks. I had mentioned several times that this was a lottery play and I said to reduce your exposure. Even if you only bought 5 contracts, this is a huge return. The total cost of the trade would have been $350 had you bought these options before yesterday’s close. That investment would now be worth $900…

I don’t know about you but $550 is a pretty good day. I had also mentioned the March 17.50 puts (SWYOW, $0.50, up $0.35) which are up 233% from yesterday’s closing price but felt more comfortable with the 20’s.

Close the trade now or set a stop of $1.60.

Before I go, International Business Machines (IBM, $87.90, up $2.00) just came out with good news. The March 95 calls (IBMCS, $0.70, up $0.20) could get some serious action.

Rick Rouse
Rick@OptionsMentoring.com