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Are Bullish Traders Looking for a Safeway Short Squeeze?

Call buying suggests hope for future upside in the grocer


The latest short-interest data from The Wall Street Journal lists grocery-store heavyweight Safeway (NYSE:SWY) among the largest short-interest positions. Simply, this means investors have shorted a hefty number of SWY shares by borrowing them from their broker at today’s price in the hopes of purchasing them at some point down the road for a lower price and pocketing the difference. In short (no pun intended), this activity can be a sign of bearishness among stock traders.

Increased short interest has been a growing trend for Safeway; since October, the number of shares sold short has surged more than 51% to 51.4 million shares. What’s interesting to note is that SWY shares have climbed by 34% over the same time period. So while the stock has been charging higher, the bears have been increasingly active.

The current short-interest supply equates to a short-interest ratio of 9.5. Calculated as simply the number of shorted shares divided by a stock’s average daily volume, this ratio tells us how many days it would theoretically take short sellers — at the average daily trading pace — to unspool all existing short positions. In the case of Safeway, it would take about two weeks.

While short selling is seen as a bearish strategy, some bullish investors like what it can say from a contrarian point of view. If a stock is heavily shorted and it begins to rally (as is the case with SWY), this can result in a short squeeze, which essentially is a rush by short sellers to bail out of their positions as the underlying stock moves higher. They do so by buying back the shares, naturally, which can create an influx of buying demand, sending the shares up further and prompting even more action on the part of nervous short sellers.

It looks as though Safeway saw some bullish options activity in Monday’s trading, so perhaps investors are hoping to capitalize on this short-squeeze potential. The stock’s March 24-strike call saw some attention, with more than 6,400 options trading compared to existing open interest of just 50 options.

In late-afternoon trading, two large blocks traded and appeared to be the work of call buyers. These traders expect moderate upside in SWY and are predicting the shares will move above the $24 price point before the options expire in mid-March (SWY closed at $22.31 on Monday). If the stock fails to make this headway, these call buyers risk 100% of their initial investment. Above the breakeven point (the strike price plus the premium paid to enter the option trade), profits are theoretically unlimited as long as the stock continues to advance.

Article printed from InvestorPlace Media,

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