Call Buyers Strike Sprouts Farmers Market Stock as Takeover Chatter Swirls

Amazon's buyout of Whole Foods has sparked takeover chatter in the grocery sector

Jun 23, 2017 at 3:06 PM
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Shares of Sprouts Farmers Market Inc (NASDAQ:SFM) are 2.1% higher to trade at $22, as buyout buzz circles the grocery stock. While Bloomberg first speculated about a potential Albertsons bid in March, Amazon's purchase of Whole Foods last Friday has sparked a fresh round of M&A chatter. Today's SFM options traders are hoping for more takeover-induced upside, too, with calls trading at more than three times what's typically seen at this point in the session. 

Most active are SFM's July 22.50 and September 27.50 calls, where nearly 4,600 contracts have collectively traded -- almost 60% of the total intraday call volume. It looks like options traders may be purchasing new positions here, betting on more gains for Sprouts Farmers Market shares over the next few months.

This appetite for long SFM calls just echoes what's been seen in the stock's options pits in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), more than 10,000 calls have been bought to open over the last 10 sessions, compared to fewer than 600 puts. The resultant call/put volume ratio of 19.40 stands just 11 percentage points from a 52-week peak.

The stock's September 25 strike has seen the largest rise in call open interest over this time frame, with 11,212 contracts initiated. The bulk of this activity appears to have occurred last Friday, and looks to be at the hands of call buyers.

Looking at the charts, the last time SFM has traded north of $25 on an intraday basis just two times in the last 12 months -- when it topped out at a 52-week peak of $25.98 on June 12, and briefly in the subsequent session. The last time Sprouts Farmers Market shares have closed north of here on a weekly basis was in May 2016. As such, and with a healthy 9.2% of the equity's float sold short, it's possible some of the recent out-of-the-money call buying is a result of short sellers hedging their bearish bets against any M&A-related upside risk.

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