Unusual Options Activity: What Do Investors Know About Progressive That I Don’t?

Progressive Corp had its busiest single day of options volume in the past two years on Wednesday, more than double the second-highest day (Jan. 17, 2024) over this period. 

The current California wildfires are the obvious reason for the attention has to be the current California wildfires. However, yesterday's unusual options activity suggests there might be more to the story.

The Cleveland-based insurance company is one of my favorites. CEO Tricia Griffith has run Progressive since July 2016. She’s done an excellent job balancing growth and underwriting profits. Doing so consistently is harder than it looks. The shares are up 26.4% annually since she took the helm. 

What’s not to like?

By examining yesterday's unusual options activity, I hope to understand why it was so crazy. While the markets are closed today for a national day of mourning for former President Jimmy Carter, it will be interesting to see how Friday trading plays out. 

In the meantime, here’s my two cents on what’s happening and why.

16 Calls and 0 Puts

Before I discuss the details of yesterday's 16 calls, I want to remind readers that unusual options activity, as I define it, are stocks expiring in a week or two, with Vol/OI ratios of 1.24 or higher. 

First, you'll notice that all 16 calls expire on Jan. 17. Their strike prices range from a low of $140 to a high of $240. 

Immediately, a bull call spread comes to mind. 

This strategy is when you believe the share price will move higher by expiration. It involves buying a call and selling a call option at a higher strike price and with the same expiration date. 

The most you can lose on this bet is what’s referred to as the Net Debit. That’s the difference between the premium paid for the long call and the premium received for the short call. The most you can make is the difference in strike values minus the Net Debit. 

The bull call strategy succeeds if the security price is above breakeven (lower strike + Net Debit). Maximum profit is achieved if the security price is above the higher strike price at expiration.  

So, let’s start with $140, the lowest strike price, and deep in the money.  

In this scenario, you would buy the $140 call for $106 (ask price) and sell the $145 call to receive $97.50 (bid price) for a net debit of $8.50. However, the maximum profit on this trade is -$3.50 ($145 strike - $140 strike - $8.50 net debit), so it’s a no-go. 

In fact, none of the scenarios above make sense for a bull call spread because the net debit is too high. 

Why Buy PGR Calls Deep in the Money?

The biggest reason to buy Progressive--or any other quality stock for that matter--deep in the money calls is you’re getting virtually the same benefit from the share price movement at a lower cost outlay than if you bought the actual stock. 

Take Progressive’s $145 call from above. It has an ask price of $100.80, 41% of Wednesday’s closing price. However, its delta is $0.99597, which means for every dollar PGR stock moves higher, the price of the call will move 99.6 cents higher. On a percentage basis, the call moves up 1% based on the $100.80 ask price [0.99597/$100.80] compared to 0.41% for the share price [$1/$243.59].

You’re getting 2.5x the profit relative to 41% of the financial outlay. That’s not a bad deal.

Why Sell PGR Calls Deep in the Money

Another possibility here is to do a straddle, which involves buying a call and put at the same strike price and expiration date. 

In this scenario, you’re expecting increased volatility in the days and weeks ahead, possibly because Progressive reports earnings on Jan. 22 or information surfaces that the Los Angeles wildfires will result in massive claims, costing the company future underwriting profits. 

The data above is from Barchart’s long straddle page for Progressive options expiring on Jan. 17.  Both examples have a 40.3% profit probability. To reduce your outlay, you might choose the second one, 22.83% of Progressive’s share price, 205 basis points less than the first. 

Your maximum loss in this scenario is $55.60. However, everything above the $245.60 is pure profit. PGR stock has to appreciate $2.01 (0.8%) over the next six trading days to start making money. It’s doable. 

I don’t see the share price falling to the downside breakeven of $134.40, so this is a bet if you’re confident about a big move in PGR stock leading up to earnings. 

Of course, the wildfire news could be terrible in the coming days, hurting the stock’s chances. J.P. Morgan analysts now estimate the insurance industry bill could hit $20 billion, making it the highest insured loss in California history.

I wish I could tell you Progressive’s precise exposure to Southern California, but I don’t have that information. 

Therefore, none of these options strategies make sense if you’re at all averse to risk.

Govern yourselves accordingly.