by Beth Gaston Moon | May 1, 2012 8:40 am
Sure, Coca-Cola (NYSE:KO) is the undisputed winner of the cola wars. But in past years, PepsiCo (NYSE:PEP) has spread its wings to make a foothold in the snack business and with the Gatorade brand.
Well, Coke isn’t taking this lying down, apparently, and may be thinking of acquiring the Monster Energy (NASDAQ:MNST) brand. According to a report in Monday’s Wall Street Journal, this would be the Atlanta soft drink giant’s biggest acquisition in 126 years.
That is, if it even happens. KO officials are denying the speculation, and the famous “people close to the matter” are saying Coke may balk on the deal after Monster’s share price shot up so high on the mere rumor.
MNST has roughly doubled in the past 12 months and jumped up nearly 30% in Monday’s trading before Coke issued its denial, which sent the shares plummeting back to earth.
Meanwhile, options traders were hard at work. MNST saw 31,000 calls trade compared with 12,000 puts for a total volume of 43,000 contracts. That’s a far cry from the daily average option volume of about 2,400 (according to iVolatility.com).
The most-active strike was the May 80 call, which saw more than 7,000 calls change hands on modest open interest of just 63 contracts (indicating new positions). The June 80 call was close behind, with 6,700 contracts trading, compared to 25 existing positions.
The influx of activity caused MNST options’ 30-day, at-the-money implied volatility to spike as well, rising 46% to 57% . In laymen’s terms, options traders are expecting MNST to be more volatile in the coming 30 days (for obvious reasons).
Traders going long the 80-strike calls expect MNST to make a dramatic move from its current post of $65 above this strike, which is 23% out of the money. It’s not that far-fetched, considering MNST rallied to almost $84 in Monday’s trading. If the stock does overcome the $80 level, the long call has unlimited profit potential. Losses, however, are capped at the premium paid for buying the call.
By contrast, the most-active MNST put was the May 65 strike, with 1,800 contracts trading on open interest of 185. If MNST is trading below $65 when May options expire, the put will be profitable.
On the other side, Coca-Cola saw 18,000 calls trade versus 40,000 puts. On an average day, Coke will see about 26,000 options cross the tape.
The lion’s share of this volume was at the May 75 put, where more than 22,000 contracts traded versus open interest of 2,500. Other popular strikes included the May Week-One weekly option 75-strike put (with 8,720 puts versus 723 contracts of open interest) and the May 77.50 call, which saw 5,000 contracts trade versus 1,400 existing contracts.
Monday’s news clearly made options players place bets for an acquisition announcement that would boost MNST shares into the stratosphere and send KO shares into the red for at least a little while.
If the rumors prove true — within the next few weeks before May options expiration — these traders may enjoy a quick profit. If not, all they’ve risked is the amount they paid to enter the trade.
At the time of this writing, Beth Gaston Moon does not own shares in any of the securities mentioned here.
Source URL: https://investorplace.com/2012/05/monster-beverage-options-spike-on-takeover-buzz/
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