Bears Target Cereal, Bulls Chase Fracker: Options Recap

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Packaged foods have struggled for a long time, while energy’s been coming to life. Those themes played out in a big way today in the options market.

The first head-turner hit in General Mills (GIS) less than two minutes into the session, with buyers snapping up the April 45 puts. They initially paid about $1.47, then $1.75 and $1.80, then $1.90. Some 14,000 contracts had changed hands by lunch, almost double the previous open interest at the strike.

Puts fix the level where a stock can be sold, so they move in the opposite direction as price. Traders use them to hedge long positions or to speculate on a drop. GIS is little changed around $44.59 in afternoon trading, with puts outnumbering calls by a bearish 3-to-1 ratio.

The downside positioning comes shortly after a profit warning triggered GIS’s biggest drop in nine years. Management blamed higher costs, but the maker of Cheerios and Wheaties was already pressured by weak sales. That follows a trend in most other consumer-products firms as once-mighty brands face new competition. Ever heard of Aldi’s?

Options traders took just the opposite approach to Whiting Petroleum (WLL), an unconventional oil-and-gas driller based in Colorado… exactly the kind of company driving the rebound in domestic energy production.

First, they snapped up about 4,700 weekly 23-March 33.50 calls expiring today for $0.90 to $1.15. Volume roughly matched previous open interest, which suggests existing positions were closed. They also sold sold matching numbers of the 29-March 35 calls for $0.69 to $0.81.

Calls are the opposite as puts, fixing the price where a stock can be purchased. They can also be written to generate income. Today it looks like holders of WLL shares had written contracts using covered-call strategies that would force them to exit their positions in the afternoon. Buying them back cost only cost $0.20 and raises their potential liquidation price by $1.50.

A mirror-image kind of transaction came next: 6,000 April 30 calls were sold for about $5.35 and an equal number of April 32s were bought for about $3.80. This time it looks like a long position in the 30s was rolled up to the higher strike. Making the adjustment let the investor recover about $1.55 of their capital.

The two trades were different on the surface but both were potentially bullish because they reflected a belief WLL will continue higher in coming weeks. The stock’s already up more than 40 percent since mid-February thanks to a strong earnings report and a potential breakout in crude oil. It also trades for less than book value and short interest represents about 19 percent of the float.

WLL rose 2.45 percent to $34.07, with calls outpacing puts by more than 10-to-1.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.