M&A activity is a theme that could continue to carry the stock market higher throughout the back half of the year. One of the biggest headlines came from Burger King Worldwide (BKW), which is teaming up with Tim Hortons (THI) to save money while, in the process, building the world’s third largest burger brand name. The strategy makes sense, as Tim’s is the largest distributor of coffee and doughnuts in Canada and BK’s breakfast menu has been a struggle at best.

But I don’t expect the BKW/THI deal to be the last food-company M&A deal that comes down the pike, so I went on the lookout for the next opportunity.

While I have thought Annie’s (BNNY) might make a good acquisition, their product line needs more development. Obviously General Mills (GIS) thought their product mix was broad enough, as they made a bid of $820 million to buy the company. But the call-option pits were light, so there certainly wasn’t speculation that a deal was coming. The BNNY Sept. 30 calls, the BNNY Sept. 35 calls and the BNNY Oct. 35 calls are ones that I’m watching closely, though I haven’t recommended them to my Momentum Options subscribers just yet.

In fact, there are five or 10 decent candidates in this area as investors go on the hunt for the next takeover food target. One that I believe would be a particularly great candidate is Diamond Foods (DMND).

The company had some shady accounting issues a few years ago and recently missed Wall Street’s expectations by 6 cents following a three-beat win streak. Earnings are due out near month-end or the first week of October.

Diamond Foods could be a nice acquisition for Coca-Cola (KO) or PepsiCo (PEP), as their nuts go well with sodas. Nuts are also healthy in moderation — and with the decline of soda consumption over the years, both companies are looking for outside growth.

The DMNX January 2015 30 calls are definitely ones to keep on your Watch List. If volume starts to pick up, these options will easily double if Diamond stock catches a bid north of $33 or is trading at this level without a buyout.

On a technical level, the chart is bearish, as shares are below all their major moving averages. However, DMND shares have held support for three months at $26, and Monday’s move was the biggest one-day gain over this period. If shares can clear $28, these options would become a buy in my book, so watch them closely.

Side note: In late July, I talked about the strong move U.S. Steel (X) might make and profiled the X Sept. 30 calls, which were going for less than a buck. Traders who have been following the Trade of the Day in the last few weeks could have purchased these options and still be in them, so I felt obligated to bring this up. If you are, please “sell to close” the options, as they expire next week and they are way in-the-money (ITM).

For beginning traders who are looking for options education, this makes a good example: Unless you otherwise tell your broker not to exercise them, ITM options still need to be closed or they could technically be exercised for you. With September options expiring next week, there is not much more juice to squeeze out of this trade, so I wanted to provide an update and make sure that traders who are new to options know to go ahead and take profits if they haven’t already.

My goal to make option trading simple enough so that a fifth-grader can learn how — and I can also teach some of the savvy traders a new trick or two from time to time.

Over the last six years, Rick Rouse has helped investors like you beat the market by an incredible 6-to-1 margin while racking up an incredible 401 double-digit and 246 triple-digit winners.  That includes the devastating 2008 market plunge. While most investors suffered devastating losses, his readers locked in 126 winners—58 for double-digit gains, 64 for triple-digit gains, and even one for a 1,057% gain.

Rick has just prepared a special free report, “The 5 Golden Rules of Options Investing,” that reveals his rules for options trading success that will help you make double- and triple-digit profits in the months ahead no matter what the market has in store. Just click here to read it right now.  

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