Reynolds American, Inc. (RAI) Hits Record Highs Amid Takeover Talk

Even though the British American Tobacco buyout rumors have been dismissed, Reynolds American, Inc. (RAI) options may be worth a look

by Josh Selway

Published on Mar 7, 2016 at 11:03 AM
Updated on Jun 24, 2020 at 10:16 AM

Tobacco giant Reynolds American, Inc. (NYSE:RAI) popped out of the gate this morning to an all-time high of $52.25, after The Telegraph released a story on Saturday suggesting British American Tobacco -- which already holds a 42% stake in RAI -- is considering a complete takeover of its American peer. However, CNBC's David Faber has since squashed the rumors, saying there have been no talks of such a deal. RAI stock was last seen 0.4% lower at $51.48. 

Still, RAI has been a technical juggernaut, as the shares have enjoyed nearly uninterrupted gains since their 2009 bottom. During the past 12 months, the stock has added almost 46%, and has outpaced the S&P 500 Index (SPX) by nearly 15 percentage points in the past 60 sessions. 

Call buyers are certainly betting on more upside. RAI's 10-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands at 5.69, topping 76% of all readings from the past year.  Today, options traders have been rushing to RAI -- especially on the call side of the fence, where intraday volume is at 21 times typical levels.

Now appears a good time to buy premium on RAI. The stock's Schaeffer's Volatility Index (SVI) sits at 22%, putting it a mere 1 percentage point from an annual low. In other words, premium on RAI's near-term options are extremely muted, from a volatility perspective.

It's also worth noting that Reynolds American, Inc. (NYSE:RAI) could further benefit from bullish analyst attention. For starters, three brokerage firms on Wall Street still rate the shares a "hold" or "sell," despite their technical prowess. Plus, RAI's average 12-month price target sits just above at $54.13, meaning the stock could be due for price-target increases.

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