Kellogg Call Options ‘Pop’ on Pringles Deal

by Beth Gaston Moon | February 16, 2012 8:55 am

Early Wednesday, Kellogg (NYSE:K[1]) announced plans to commit $2.7 billion to acquire the Pringles brand of potato crisps[2]. K is taking the 44-year-old brand away from the control of its original parent company, Procter & Gamble (NYSE:PG[3]). Kellogg was a new suitor for the snack food after a previous deal with Diamond Foods (NASDAQ:DMND[4]) hit the skids.

Generally speaking, the company doing the bidding for a subsidiary will suffer a short-term decline in its share price as investors weigh the out-of-pocket cost for the purchase against the potential benefits (or drawbacks).

In this case, however, The Street seemed pleased with Kellogg’s strategy. K shares rallied more than 5.1%, to $52.87, during Wednesday’s session, closing at their highest point in almost five months. As Forbes reported, the stock even broke out above its 200-day moving average[5] for the first time since its early-November gap lower.


Options traders also cheered the marriage of the mustachioed potato-chip maestro and Tony the Tiger. More than 23,000 Kellogg options traded on Wednesday, compared to slightly more than 1,000 the previous session. The large majority of this volume (19,000 contracts, or 83%) was on the call side.

The lion’s share of this volume was concentrated at the February 52.50 call strike, which saw volume of about 8,500 contracts versus existing open interest of 5,015. In other words, at least some of this trading activity will likely translate as new open interest.

Now in-the-money, thanks to the stock’s pop higher, these calls traded for an average premium of 43 cents each, or $43 per contract. They are also set to expire on Friday.

This activity suggests investors buying the calls expect the stock to display a little more strength in the next 48 hours. If K is trading above breakeven of $52.93 (the strike price plus the premium paid) when the options expire, the trade will be profitable (excluding commissions and fees). The shares close at $52.87 on Wednesday puts them just six cents away from this breakeven point.

The risk to a long call, meanwhile, is limited to 100% of the premium paid, if K shares are trading south of the strike price at Friday’s closing bell. Gains are theoretically unlimited through expiration as long as the underlying share price continues to move higher.

In addition to this heavy front-month volume, K saw some action in the March series, with investors trading the 50-, 52.50-, and 55-strike calls. The June 55 call strike also saw a bit of notable trading activity.

The action at these strikes could be similarly bullish toward K but a bit more conservative in nature. Premiums were higher (up to 75 cents apiece for the June calls), but the stock isn’t required to make headway in just two days’ time. Perhaps technical analysts are hoping the stock’s intraday rise on Wednesday through a significant moving average will open the door to a renewed uptrend.

Meanwhile, one has to ask: Is there a market for Honey-Smacks-flavored Pringles?

  1. K:
  2. acquire the Pringles brand of potato crisps:
  3. PG:
  4. DMND:
  5. broke out above its 200-day moving average:
  6. [Image]:

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