Option Bulls Pay to Play Monsanto Company (MON)

Monsanto Company's (NYSE:MON) call options have been on fire since Thursday's M&A chatter, and the heightened volatility expectations have made MON's short-term options relatively pricey

May 13, 2016 at 12:14 PM
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Monsanto Company (NYSE:MON) is trading higher again today, following Thursday's pop on M&A chatter regarding German firms BASF and Bayer AG. The shares are up 1.4% at $99.24, and on pace to close above their 50-week moving average for the first time in nearly a year, set to rack up a weekly gain of nearly 11%. Against this backdrop, bullish action has ramped up in Monsanto's options pits, and buyers are paying a hefty price to play the stock.

MON weekly chart

At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 50-day call/put volume ratio of 5.38 indicates more than five MON calls have been bought to open for each put over the past 10 weeks. Moreover, this ratio ranks higher than 99% of all readings in the last year. Plus, the security's Schaeffer's put/call open interest ratio (SOIR) remains docked at an annual low, mean short-term traders haven't been more call-skewed in the past 12 months.

And options action has been heating up since Thursday's news. In fact, stock and option volume both hit annual highs yesterday, with calls more than tripling puts. Call open interest is now at a 12-month high for MON.

Today, MON calls are trading at twice their typical intraday pace, with more than 14,000 on the tape so far, compared to just 3,659 puts. Most active are MON's May 100 and 105 calls, the buyers of which are hoping MON treks into triple-digit territory -- possibly on a lucrative buyout bid -- by the end of next week, when front-month options expire.

As alluded to earlier, options buyers are not getting their bets cheap. MON's Schaeffer's Volatility Index (SVI) of 48% is in the top percentile of its annual range, while its 30-day at-the-money implied volatility sits at 38.1% -- higher than 99% of the past year's readings -- after hitting a yearly high on Thursday. That means Monsanto Company's (MON) short-term premium is pricing in elevated volatility expectations at the moment.

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