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Molson Coors Brewing Company (TAP) Traders Eye Uncharted Territory

Molson Coors Brewing Company calls are flying off the shelves today

by 6/11/2014 3:02 PM
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It's a big day for Molson Coors Brewing Company (NYSE:TAP), which tagged the $72.30 mark earlier -- its loftiest perch on record -- but was last seen up 1.1% at $71.47. Stoking the bullish flames was an early morning upgrade to "buy" from "underperform" at BofA-Merrill Lynch, which came on the heels of yesterday's upbeat outlook on global beer demand growth. Against this backdrop, call volume has soared to more than 18 times the intraday average, with a number of speculators betting on an extended run higher over the long term.

Taking a quick step back -- short-term options are in high demand, per the stock's 30-day at-the-money implied volatility (IV), which has jumped 15.4% to 24.4% -- levels not seen since mid-February. However, the two most active contracts are of the longer-term variety; specifically, the October 70 and 75 calls. The lower strike has seen 4,093 contracts cross the tape, mostly at the ask price. What's more, IV is up 2.8 percentage points and volume outstrips open interest, making it safe to assume new positions are being purchased.

Based on TAP's current perch, these calls are in the money. In order for today's call buyers to profit at expiration, though, the stock must be sitting above breakeven at $73.74, which is the strike plus the volume-weighted average price (VWAP) of $3.74, at the close on Friday, Oct. 17 -- when the options expire. Gains will accrue with each additional step above this mark the stock is sitting, while risk is limited to the initial cash outlay, should TAP finish south of $70 at expiration.

Meanwhile, 15,759 contracts have changed hands at the October 75 call -- 82% at the ask price, pointing to buyer-driven activity. IV is up 3.9 percentage points, and open interest houses just 2,278 positions at present, making it safe to assume a fresh batch of bullish bets is being initiated. Given the call's VWAP of $1.99, at-expiration breakeven for this out-of-the-money strike is $76.99. As a result of today's pop, delta on the call has risen to 0.38 from 0.32, indicating a roughly 38% chance the call will be in the money at October options expiration.

From a contrarian perspective, additional analyst-induced tailwinds could be on the horizon for Molson Coors Brewing Company (NYSE:TAP). No fewer than five of the seven covering analysts maintain a "hold" or worse suggestion toward the security, compared to two "strong buy" ratings. Plus, the consensus 12-month price target of $65.67 stands at a discount to present trading levels. Should TAP continue to have success on and off the charts, an additional round of bullish brokerage notes could help fuel the stock's fire. On a related note -- the company will host its annual analyst meeting on Wednesday, June 25.


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