Option Bulls Keep Buying as Takeover Talk Lifts Kellogg Company (K) to Highs

Kellogg Company (NYSE:K) stock is trading at all-time highs amid buyout speculation

Jul 15, 2016 at 2:20 PM
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Kellogg Company (NYSE:K) stock hit yet another all-time high earlier today at $86.16, as M&A speculation continues to drive shares of the cereal giant higher. K was last seen up 0.8% at $86, having now added 10.9% since its June 29 close -- the day before Mondelez International Inc's (NASDAQ:MDLZ) bid for Hershey Co (NYSE:HSY) sparked buyout talk in the food and beverage sector. With respect to Kellogg, rumor has it The Coca-Cola Co (NYSE:KO) could be eyeing a takeover. Meanwhile, not only is K stock volume soaring, but its options activity is through the roof. 

Looking closer, call volume is running in the 100th annual percentile, while total open interest for both calls and puts is now at a 12-month high. More than 17,000 calls have traded today, versus just 2,200 puts. In the lead, by far, is the August 95 call, which appears to be seeing mostly buy-to-open activity -- meaning traders are betting on K shares to rally another 10.5% and eclipse the $95 mark by the close on Friday, Aug. 19, when the options expire. 

It's not surprising that call buying has been extremely popular during the past two weeks, given the M&A chatter. In fact, the stock's 10-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) has almost tripled since June 29, and at 6.00, outranks 85% of the past year's readings. 

Further illustrating just how call-skewed K options traders are, the stock's Schaeffer's put/call open interest ratio (SOIR) comes in at 0.49. This tells us that call open interest doubles put open interest among options expiring within three months. 

That doesn't mean K options are necessarily expensive, though. On the contrary, the stock's Schaeffer's Volatility Index (SVI) of 28% ranks in the bottom one-third of the past year's readings, meaning near-term K options are still favorably priced, from a volatility standpoint. 

Outside the options pits, it'll be interesting to see how analysts react to K's recent surge, since 12 of the 14 that track the shares call them a "hold" or worse. Plus, the stock has stormed past its average 12-month price target, which sits at just $78. 

Make no mistake about it, Kellogg Company (NYSE:K) boasted a strong 12-month lead even before the buyout talk started -- though the aforementioned $78 level had been acting as stiff resistance since April. In other news, the company's wholly owned subsidiaries, Kellogg Sales Company and Kellogg Funding Company, LLC, have formed a receivable sales agreement

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