Big Printin’ – Kellogg (K) Call Tree

by Dan February 21, 2017 4:16 pm • Big Printin'

There was an interesting options trade today in a relatively uninteresting stock, Kellogg (K). When the stock was trading $74.15 a trader paid 14 cents for the March 80 / 85 / 90 call tree, 20,000 times. Let me break that down as it is a trade structure we don’t discuss much. The tree, which is really a 1×2 ratio spread where a trader buys one of the lower strike and then tells two separate higher strike options one time each (or lower strikes when a put tree).

The trader in this case bought to open 20,000 March 80 calls for 32 cents, sold 20,000 March 85 calls at 12 cents (these are apparently closing) and sold to open 20,000 March 90 calls at 6 cents.  This was likely a roll where a trader sold out of the March 85 calls and bought to open the March 80/90 call spread and was just traded as a tree.

While the stock has clearly been an under-performer, down nearly 15% from its 52 week and all time highs made in July, this trade seems to target a move back to its prior highs in the next month:

Bloomberg

I think it is safe to say that Kraft Heinz brief takeover foray with Unilever has gotten investors thinking about who could be next as consumer staple companies make their shopping lists. If all three legs of this had been opening, it wouldn’t have been the proper structure from a stock that could pop on rumors (because it is net short above the highest strike.) But in this case, the ratio after the trade is 1×1, or a call spread, because the March 85 call sale was closing. This trader essentially turned an out of the money call, into a closer to the money call spread, but still gave themselves plenty of room to the upside (to 90) for any potential tape bombs that rip the stock higher.

We’ll keep this one on our radar.