Wednesday, May 4, 2011

ConAgra (CAG) - Stock and Vol Pop on Raised Bid for RAH

CAG is trading $25.22, up 1.9% with IV30™ up 27.9%. The LIVEVOL® Pro Summary is below.


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ConAgra Foods, Inc. (ConAgra Foods) is a food company. The Company operates in two segments: Consumer Foods and Commercial Foods. This is a takeover-er rather than takeover-ee. Here's the news snippet from

ConAgra Foods Inc. on Wednesday disclosed a $4.9 billion offer to buy Ralcorp Holdings Inc., increasing a previously rejected offer in a bet that private-label food sales will continue to grow.

ConAgra is offering $86 a share in cash for Ralcorp, the owner of Post cereals and maker of private-label pasta, crackers, jams and other items, higher than an $82-a-share cash-and-stock offer made in March. The latest offer is a 3.2% premium to Ralcorp's closing price on Tuesday, though 25% higher than the one-month average before news reports said Ralcorp had been approached.
Source: ConAgra Offers $4.9 Billion for Ralcorp


Interestingly, the bidder is up (i.e. CAG is up, not just RAH). CAG has traded over 16,500 contracts on total daily average option volume of just 2,739. Calls have traded on an 8.4:1 ratio to puts. The action has been in the May 25, 26 and Jun 25, 26 calls where over 10,000 have traded. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the May calls and Jun 26 calls are mostly opening (compare OI to trade size). The Jun 25 calls show 7,300+ OI. Here's my take on the order flow:

May 25 calls: substantially purchases.
May 26 calls: substantially purchases.
Jun 25 calls: Interest looks long. Flow today is ambiguous.
Jun 26 calls: substantially purchases.

The Skew Tab snap (below) illustrates the vols by strike by month.

It's interesting that the upside skew is not bid in either of the front three months. There is a small skew scalp possible on the table between the May 26 and Jun 26 calls -- I've highlighted those strikes above.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

Two pretty obvious phenomena here:
1. The stock is up.
2. The IV30™ is really up.

The best I can tell is that the possibility of adding RAH and it's record of stock price appreciation/growth to CAG has investors happy on both sides. Happy with RAH going higher, happy with CAG potentially growing faster. I dunno...

Possible Trades to Analyze
1. Trade the May/Jun upside skew:
a. May/Jun 25 call spread costs ~$0.30 with $0.22 in parity.
b. May/jun 26 call spread costs ~ $0.25.

2. An odd ball:
If CAG stock keeps going up every time it bids higher for RAH, and RAH keeps going up too:
Own deltas in RAH and sell upside vol in CAG. There are a bunch of different trades here with deltas and upside vol between these two names. Even a pair trade (long/short) is worth examining.

This is trade analysis, not a recommendation.

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