Flowers Foods options in play as shares flourish on Hostess Brands bankruptcy

Flowers Foods options in play as shares flourish on Hostess Brands bankruptcyFlowers Foods, Inc. (NYSE:FLO) –
Shares in the provider of packaged bakery products are up nearly 7% this morning at $23.86 as of 11:35 a.m. after the stock was raised to ‘buy’ from ‘hold’ with a 12-month target price of $25.00 at Keybanc Capital Markets. Flowers Foods, Inc., which sells its products under a number of brands, including Sunbeam and Tastykake, has attracted far greater-than-usual options activity in recent trading sessions on speculation the Thomasville, Georgia-based baker may consider purchasing some of rival Hostess Brands, Inc.’s assets as that company enters bankruptcy proceedings this week. Flowers Foods shares are up nearly 30% since Monday of last week. Traders positioning for shares in the name to extend gains purchased upside calls on Flowers this morning. The Dec. $25 strike call was purchased 50 times for a premium of $0.15 apiece, while 140 of the Jan. 2013 $25 strike calls were picked up at an average premium of $0.33 each. These contracts make money if shares in the name hit fresh 52-week highs by their respective expiration dates. Meanwhile, strategists who established bullish positions last week are seeing sizable gains in the value of their option contracts as shares sprint to the upside. The purchaser of 90 calls at the Dec. $20 strike last Monday for a premium of $0.30 apiece now holds contracts that cost $3.90 apiece, or thirteen times as much, as of midday in New York. Similarly, traders who picked up 180 of the April 2013 $22.5 strike calls at $0.90 apiece on Friday, find the value of their contracts increased 120% to $2.00 since the prior trading session. Finally, put buying at the $22.5 strikes in January and April indicates some traders are establishing downside protection to hedge possible declines in the price of the underlying in the months ahead. Overall options volume on Flowers this morning is greater than 1,050 contracts versus the stock’s average daily options volume of 45 contracts.

JPMorgan Chase & Co. (NYSE:JPM) – Weekly call options on the largest U.S. bank by assets saw heavy volume in the early going on Monday as shares in JPMorgan move higher amid a booming start to the trading week for equities across sectors. Shares in JPM are currently up 2.9% at $40.69 as of 12:40 p.m. ET in New York. The most active weekly options on JPMorgan are the Nov. 23 ’12 $40.5 strike, which have changed hands more than 17,000 times thus far in the session. Much of the volume printed just after 10:45 a.m. this morning, with a large block of approximately 6,000 contracts trading to the middle of the market at $0.36 apiece, and around 5,000 calls purchased at the same price. Buyers of these contracts in the early going find the value of their now in-the-money options has increased substantially since this morning, currently up 36% on the day at $0.49 apiece in early-afternoon trading. Higher-strike calls expiring at the end of this week attracted much lighter volume that the $40.5 calls, but most of the contracts in play appear to have been sold. Similarly, it looks like traders are largely selling the most active December expiry call options changing hands today.

Smithfield Foods, Inc. (NYSE:SFD) – Shares in pork producer, Smithfield Foods, Inc., are up 4.5% on Monday afternoon to stand at $21.77 amid a strong up-day for U.S. equities and after Tyson Foods posted better-than-expected fourth-quarter earnings and sales ahead of the opening bell this morning. Smithfield Foods is scheduled to release its second-quarter earnings report on December 6th. Bursts of call activity in the December and January expiry call options just after 10:30 a.m. ET today suggests at least one trader is positioning for the price of the underlying to extend gains in the near term. Around 1,000 calls were purchased at the Dec. $22 strike for an average premium of $0.70 apiece, while some 2,300 call options were picked up at the Jan. 2013 $22.5 strike at an average premium of $0.73 each. Dec. $22 strike calls make money if shares in Smithfield rally 4.3% to exceed $22.70 by expiration, while Jan. 2013 $22.5 strike calls are profitable should the hog producer’s shares surge 6.7% to top $23.23 at expiration next year.

Caitlin Duffy

Equity Options Analyst

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