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Twinkie Turmoil Fuels Bullish Betting on Flower Foods

FLO fans are flocking to short-term call options

by 11/21/2012 12:14 PM
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The shares of Flower Foods, Inc. (NYSE:FLO - 23.16) have added around 17% so far this month, and are now just a hair's breadth from record-high territory. Against this backdrop, option bulls are coming out in full force, with more than 3,500 calls already traded today -- about 72 times the stock's average intraday call volume. For comparison, fewer than 200 FLO puts have changed hands.

Nearly all of the action has centered on the out-of-the-money December 25 call, which has seen close to 3,100 contracts cross the tape on open interest of fewer than 300 contracts, pointing to newly opened positions. Plus, 99% of the calls have traded at the ask price, suggesting they were bought.

By purchasing the calls to open, the buyers are expecting FLO to surmount the $25 level -- in all-time high territory -- within the next few weeks. More specifically, the calls changed hands at a volume-weighted average price of $0.25, meaning the buyers will reap a reward if FLO topples the $25.25 level (strike plus average premium paid) by December options expiration. However, even if FLO remains south of the strike, the most the buyers can lose is the initial premium paid.

From a broader sentiment perspective, today's appetite for bullish bets marks a change of pace for FLO. The equity's Schaeffer's put/call open interest ratio (SOIR) of 0.74 registers in the 86th percentile of its annual range, implying that near-term options players are more put-biased than usual right now.

Likewise, even after depleting by 44% during the past month, short interest still represents more than seven sessions' worth of pent-up buying demand, at FLO's average pace of trading. In the same vein, despite outperforming the broader S&P 500 Index (SPX) by nearly 21 percentage points during the past 20 sessions, not even half the analysts following the snack maker deem it worthy of a "buy" or better rating.

As alluded to earlier, the shares of FLO have been on fire lately. The stock gapped significantly higher late last week, after rival Hostess Brands Inc. announced plans to go out of business -- fueling hopes that Flower Foods could buy parts. The security is adding to its gains today, after the Twinkie maker's last-minute effort to mend fences with striking workers fell short.

At last check, the stock has advanced 4.8% to flirt with the $23.16 level. Should FLO continue to progress -- on or off the charts -- a short-squeeze situation or a round of upbeat analyst notes could add contrarian fuel to the fire.


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