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ConAgra Call Buyers Active Before Earnings

Bullish traders stocking up on near-the-money calls

by 6/14/2012 11:11 AM
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Chances are, you've got a ConAgra Foods, Inc. (CAG - 24.94) brand somewhere in your kitchen, be it Peter Pan peanut butter, Wesson oil, Chef Boyardee, Orville Redenbacher's, or the ever-popular Slim Jim (to name a few). In Wednesday's trading session, CAG shoppers bought something else – long calls for their portfolios.

Call volume was three times more robust than usual on the day, and roughly 85% of the volume was concentrated at the near-the-money September 25-strike call. More than 2,000 contracts traded at this strike, 99% of which went off at the ask price (indicating buyers) and 75% of which translated as new open interest this morning.

The calls were purchased for an average of $0.75 each, which is the most the investor can lose if the stock turns south. Above breakeven of $25.75, gains are unlimited through expiration as the stock moves higher. The delta on this option is currently 48%, meaning there is roughly a 50/50 shot of it being in-the-money by expiration, if all factors are held equal. This delta reading also means the option will rise $0.48 for every $1.00 advance in CAG shares (and lose $0.48 if CAG were to drop $1.00).

Call speculation hasn't exactly been the rage on CAG of late. In the last 50 days, 166 calls have been bought to open on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) for every 100 calls. While calls still easily outpace puts, this ratio is lower than 82% of the past year's readings, indicating the trend among option buyers is far less optimistic than usual, Wednesday's call volume notwithstanding.

Elsewhere in the options community, CAG's Schaeffer's put/call open interest ratio (SOIR) of 0.47 (a ratio of puts open in the front three-months' series versus calls) is higher than 78% of all annual readings, another sign that bearishness has slowly been overtaking the stock's sentiment backdrop.

CAG is set to report earnings next Thursday, and analysts are expecting per-share results of 50 cents, one penny below the company's year-ago profit. The company has had mixed results in the earnings confessional of late, with two positive and two negative surprises.

Technically speaking, the stock is staring up at resistance in the 26-27 level, which has contained upside in the shares for more than five years. Buttressing this resistance is heavy call open interest at the 27 and 28 strikes in the soon-to-expire June and the September series. Call buyers may be hoping a strong earnings report will be the push CAG shares need to begin muscling above this trading range. On the downside of the shares, meanwhile, is the 160-week moving average, which has contained all weekly closes in the stock since mid-November 2009.

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