Call Traders Load Up on Spice Stock After Earnings

MKC options are affordably priced now after a volatility crush

Digital Content Manager
Jun 25, 2020 at 10:58 AM
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The shares of McCormick & Company, Incorporated (NYSE: MKC) are up 3.7% at $177.64 today, and earlier nabbed a record high of $180.93 out of the gate. This comes after the spice and seasoning mix company reported second-quarter profits of $1.47 per share on $1.4 billion in revenue, considerably higher than Wall Street's estimated $1.16 on $1.37 billion. The company attributed the boosted results to an increase in home cooking during COVID-19 lockdowns, and said it expects increased demand to continue through the the second half of 2020.

On the charts, MKC has staged an impressive comeback from its late-March lows near the $112 level, culminating in a then record-high of $180.38 on May 18. And while MKC has traded sideways since then, the stock's 40-day moving average has stepped up as support over those past couple of weeks, a sure contributor to the equity's now 27.7% lead for the quarter. 

Analysts were largely skeptical toward MKC coming into today, with five of the eight in coverage carrying a tepid "hold," while the remaining three called it a "sell" or worse. Meanwhile, the stock's consensus price target of $154.30 is a 12.3% discount to current levels. In other words, MKC could climb even higher in the event of a shift in analyst attention.

The appetite for calls is unusually high in the option pits, however. In the last 10 days, 1.63 calls were bought for every put at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio sits higher than 82% of readings from the past year, meaning calls are being picked up at a faster-than-usual clip.

The options pits have exploded today, amid limited absolute volume. At last check, call trading was sitting at 10 times the average intraday amount, and almost triple the number of puts traded. The most popular is the July 185 call, with new positions being opened. Buyers of this call are banking on a sustained push higher from MKC in the next month, when the options expire.

Now with earnings in the rear-view mirror, a volatility crush means options are affordably marked. MKC's Schaeffer's Volatility Index (SVI) of 32% sits in the 22nd percentiles of all other readings from the past year. This means options players have been pricing in relatively low volatility expectations at the moment.  

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