Buyout Bid has Ralcorp Options Rising

by David Russell | May 9, 2011 9:28 am

The stock of breakfast-cereal maker Ralcorp (NYSE: RAH[1]) has been rising recently and some options trading investors expect it to continue into next month.

First, agri-giant ConAgra (NYSE: CAG[2]) made an unsolicited $4.9 billion takeover offer for Ralcorp. Then RAH announced strong fiscal second-quarter results, with full-year guidance above analysts’ forecasts.

While brands such as Pebbles and Honey Bunches of Oats have been taking market share, RAH’s real strength is in products that grocery stores sell under their own names, those private-label brands that consumers buy to save a bit on the weekly food bill. Consumers evidently believe they match up well with the name brands that spend mucho bucks on advertising campaigns that make them name brands.

RAH traded for about $70 before the takeover chatter emerged. Combined with the strong results and CAG’s official $86 offer on Wednesday, the cereal company ended the week at $90.34.

On Friday, optionMONSTER’s Heat Seeker tracking system detected the purchase of 1,555 RAH June 95 Calls for $0.85. An equal number of RAH June 100 Calls were sold at the same time for $0.10. There was virtually no open interest in either strike when the session began.

Find more option analysis and trading ideas at Options Trading Strategies[3].

This bullish call spread is a bet that CAG will raise its offer for RAH to at least $96. The option strategy cost $0.75 and stands to earn a maximum profit if the stock closes at or above $100 on expiration.

Given that RAH has remained above the bid price, investors clearly think that the amount will be increased. Overall option volume in the name was 10 times greater than average in the session, with calls outnumbering puts by 3 to 1.

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  1. RAH:
  2. CAG:
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