April 25, 2017 / 5:36 PM / 5 months ago

AdvancePierre deal a delicious treat for timely options buyers

Traders and executives gather for the IPO of AdvancePierre Foods Inc. on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., July 15, 2016. REUTERS/Brendan McDermid

NEW YORK (Reuters) - Traders took a big bite out of AdvancePierre Foods Holdings’ APFH.N near-term bullish options just days ahead of Tuesday’s announcement by Tyson Foods (TSN.N) that it would buy the packaged sandwich supplier for $3.2 billion.

AdvancePierre’s shares jumped 10 percent to a record high of $40.29 on Tuesday after Tyson Foods said it offered $40.25 per share for the company.

Traders in the options market appear to have been prepared for some such move. Starting April 18, AdvancePierre’s options, which usually attract little activity, drew an unusual rush of bullish trading, market watchers said.

AdvancePierre’s shares too perked up. In the five trading days prior to Tyson’s offer on Tuesday, the company’s shares rose 13 percent.

“The deal was well telegraphed by the options market and I have little doubt it leaked at least a week in advance of the official release,” said Joe Kunkle, founder of options-market data service OptionsHawk.com in Philadelphia.

Through Monday, AdvancePierre’s five-day average daily options trading volume hit about 2,400 contracts. Its average daily trading volume, prior to last week, was about 25 contracts, according to New York-based options analytics firm Trade Alert.

Call options betting on shares rising above $35 and $40 by May 19 were in high demand and about 9,200 of these contracts changed hands over the last five days.

Calls convey the right to buy shares at a fixed price in the future and are usually used to place bets on shares rising.

Tuesday’s big jump in AdvancePierre’s shares made for sizeable gains for the timely options buyers. As option volume on the company increased over the last week, the May $35 call options traded at an average price of $2.60. That alone was a huge gain from the $0.25 the contracts traded at before the surge in volume. They then nearly doubled in value to trade for an average price of $5.17 on Tuesday after the deal was announced.

On Tuesday, traders appeared to be closing the recently opened position in these contracts at a profit, said Fred Ruffy, options analyst at Trade Alert.

Options activity has been known to spike before the public announcement of deals, and the U.S. Securities and Exchange Commission has in the past announced enforcement action for alleged insider trading violations involving options.

The SEC declined to comment on AdvancePierre’s share and option activity.

Reporting by Saqib Iqbal Ahmed, additional reporting by Lance Tupper; Editing by Daniel Bases and Chris Reese

Our Standards:The Thomson Reuters Trust Principles.
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