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Daily Options Intelligence Report

Kraft slumps after chocolate deal melts down

Tue, Sep 8 2009, 16:59 GMT
by Andrew Wilkinson

Interactive Brokers LLC  |  View company's profile

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KFT – Kraft Foods Inc. – One option trade really surprised us after Britain’s chocolate-maker, Cadbury rejected out of hand a $16.2 billion bid from maker of Kool Aid and Oreo cookies. For two months now, shares of a much-leaner Kraft Foods have been trying to head north of $29, only for today’s rejection conspiring to reverse the process. Indeed the 5% decline to $26.70 at one point saw Kraft’s share price trade at its lowest point since July 10. While the reaction may seem overdone with other onlookers noting that the current price makes Kraft look appetizing, we wonder what the motivation was behind the sale of 10,300 call options today expiring in January with a 27.50 strike price. The block of options clearly went through to the bid side at a 1.05 premium. Shares have not traded beneath that strike price since July 21 and we’re not entirely sure that the reason it did not is linked to any pending deal. One explanation could be the closing sale of a block of 10,000 calls bought in February at a 1.25 premium. Today’s pessimism might have been a game-changer for this investor’s strategy. But outside of that, we’re left scratching our heads at today’s new-found pessimism.

FDX – FedEx Corp. – Investors employed bearish tactics on FDX amid a 0.5% decline in shares during the session to $70.40. Some traders enacted put spreads in the October contract. Perhaps these individuals expect further downward movement in the price of the underlying through expiration. It appears that 10,000 puts were purchased at the October 70 strike for 3.59 apiece and spread against the sale of 10,000 puts at the lower October 60 strike for 86 cents each. The net cost of purchasing the spreads amounts to 2.73. Investors may or may not hold long positions in the underlying stock. If put-spreaders are long FDX then downside protection will kick in if shares decline beneath the breakeven price of $67.27 by expiration. Alternatively, if traders are short the stock, maximum potential profits of 7.27 per contract would be realized if shares plummeted 15% to $60.00. Additional bearish indications were observed through the sale of approximately 1,500 calls at the October 70 strike for 3.80 apiece and at the October 75 strike for 1.60 each.

HNT – Health Net, Inc. – The managed care organization edged onto our ‘hot by options volume’ market scanner this morning after bullish investors were observed populating the near-term September and October contracts. Shares of the firm are currently lower by 1% to stand at the current price of $16.37. Option traders positioned themselves for a rally in Health Net by purchasing about 3,700 calls at the September 17.5 strike for an average premium of 37 cents each. HNT must rise 9% higher in order for call-buyers in the front month to breakeven at $17.87. Bullish sentiment spread to the higher October 20 strike where 1,100 calls were coveted for about 28 cents apiece. Investors holding these contracts are hoping to see at least a 24% rally in shares through the breakeven point at $20.28 by expiration next month. Finally, the 27% rise in option implied volatility to 61% on the stock suggests greater investor uncertainty regarding the health firm, perhaps ahead of President Obama’s speech tomorrow evening.

FXI – iShares FTSE/Xinhua China 25 Index Fund – Bearish options activity was observed on the China exchange-traded fund today despite the more than 2.5% rally in shares of the underlying stock to $42.20. Pessimism in the front-month was observed through the purchase of approximately 2,300 in-the-money puts at the September 43 strike for 1.30 apiece. The put activity here would be considerably less bearish if investors purchasing the contracts hold long positions in the FXI. Otherwise, traders are essentially positioning short the stock and are expecting to accumulate profits to the downside beneath the breakeven point at $41.70 by expiration. Bearish sentiment in the October contract was displayed by one investor who shed calls to buy puts. It appears that the trader sold 4,000 calls at the October 44 strike for a premium of 1.15 each in order to purchase 4,000 puts at the lower October 39 strike for 90 cents apiece. The investor receives a net credit of 25 cents per contract, which he will retain in full as long as the calls remain out-of-the-money through expiration. Additional profits are available to the trader in the event that shares of the FXI fall through $39.00.

Published on  Tue, Sep 8 2009, 17:04 GMT

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