Why ConAgra Foods Inc (CAG) Bulls May Be Hungry For More Earnings Upside

ConAgra Foods Inc (NYSE:CAG) is higher after earnings, but it looks like option traders want more

Dec 22, 2015 at 11:23 AM
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After topping earnings expectations this morning, food producer ConAgra Foods Inc (NYSE:CAG) has picked up 1.1% to trade at $41.42. Although these gains bring CAG's year-to-date lead to 14.2%, the stock again topped out just below $42, a level the shares have struggled to surmount since their mid-August bear gap.

151222CAG

No doubt option traders have their eyes set on this level. Over the past 10 days, no CAG option has seen a greater increase in open interest than the January 2016 42-strike call, where over 2,300 positions were added. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) confirms that most of these positions were bought to open, suggesting traders have been speculating on a move above $42 for the shares before January expiration. 

Going off this point, call buying has been nearing an annual-high speed at the ISE, CBOE, and PHLX over the past 10 sessions. CAG's 10-day call/put volume ratio stands at an elevated 12.63. This reading is just 14 percentage points from an annual peak. In short, there's been an unusually pronounced interest in call buying compared to put buying of late. 

Reaffirming this call bias is the food stock's Schaeffer's put/call open interest ratio (SOIR). At 0.38, this reading tells us that call open interest heavily outweighs put open interest, when looking at options that will expire in the next three months. Plus, it sits below nearly two-thirds of readings from the past year. In layman's terms, this means speculators taking a short-term approach are more call-skewed than normal at the moment. 

It's also interesting to note that, going into this morning's event, the options market was pricing in a 6.3% post-earnings move for CAG, based on the stock's near-term at-the-money straddle data. Obviously, today's move is much more muted than was expected.

Option traders weren't the only ones active ahead of CAG's quarterly event. Short interest surged by over 34% in the most recent reporting period. Still, ConAgra Foods Inc's (NYSE:CAG) short-interest ratio sits at a modest 2.70, meaning there's limited sideline cash available to fuel a short-covering rally.

 

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