Since mid-July shares of Progressive made several attempts at breaking out above the $31.00-$31.50 resistance level. At the same time the $18B auto insurer put in a series of higher lows, which led to October 7th’s close above the $31.50 level. PGR may be up over 20% year to date, but there is likely another 5-10% of upside left in the tank in the coming months.
For one thing the daily chart above shows a text book resolution of an ascending triangle (bullish) that was in the works over the summer. Depending on what level you use for a measured move target, shares could rally to $33-$35 before a major pullback occurs. For risk management purposes a stop loss on a long stock position can be placed under $30.
As I noted in my TraderPlanet commentary from July 16th, (http://www.traderplanet.com/commentaries/view/168643-progressive-buy-this-insurer-on-weakness/) M&A activity remains a potential catalyst for insurers, especially in the Property & Casualty sub-sector where there is still more room for deals.
Progressive is growing revenue around 10% annually (topping $10B in 2015), but earnings growth remains in the low single digit range. This could lead to shareholder pressure for change and that could come in the form of buying a faster growing smaller competitor or possibly even entering the home/farm market to complement their auto and motorcycle business.
Heading into the Q3 earnings report on October 16th, options activity is still overwhelmingly in favor of the bulls through the beginning of 2016. 11,000+ Nov $27 calls, 4,000+ Nov $31 calls, and 10,000+ Feb $30 calls remain in open interest. Most of the large players in these contracts have been holding patiently since the start of the summer.
Progressive Options Trade Idea
Buy the Feb 2016 $31 call for $1.75 or better
Stop loss- $0.85
1st upside target- $2.75
2nd upside target- $4.00
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