Thursday, February 14, 2013

HJ Heinz (HNZ) - Takeover and a Cheater? Maybe...

HNZ is trading $72.40, up 19.7% with IV30™ down 35.5%. The LIVEVOL® Pro Summary is below.

H. J. Heinz Company together with its subsidiaries is engaged in manufacturing and marketing a range of food products throughout the world.

HNZ is up due to a takeover bid from Berkshire with the help of another private equity firm for $72.50 per share. Clearly the equity market reflects a high likelihood that the deal will be approved by the HNZ board and shareholders as the stock is trading $72.41.

But this isn’t a note about a takeover, it’s a note about the day before a takeover… and it’s a disturbing one. Let’s start simple. I have included the average daily option volume for HNZ over the last three months, below.

Note that the 1,986 number reflects the total daily average volume across all calls for a day. Over the last month, the average is closer to 1,000. Next, let’s turn to an all-time stock chart for HNZ, below.

Provided by Yahoo! Finance

We can see that in the nearly 30 year history of the stock it has never traded at $65. Why do I choose $65 as a price? Here’s why… Let’s look to the options Montage for HNZ on close as of yesterday, below.

We can see that 2,593 Jun 65 calls traded on existing OI of just 364. Again, note that the volume in just the Jun 65 calls is more than 125% of the total daily average volume in ALL calls for HNZ. Note as well that HNZ has never traded at $65.

A fair question is, “were most of these trades on the same side?” And the answer is provided by the OI chart, below.

That blue line represents the OI in the Jun 65 calls as of this morning for the last month. We can see it was steady (and small), then yesterday popped dramatically. How dramatically?... Let’s turn to the Options Tab for today, below.

We can see the OI rose from 364 to 2626 or 2262 opening long positions at a strike price that has never been reached in 30 years… And then the takeover news…

In total we have an OTM call strike trading more than 125% of total daily average call volume on a strike price that has never been reached by the stock in 30 years and then the next day a $0.35 option is worth $7.50. That’s a 2,000% return or ~1.5 million gain in one day.

How fortunate... Of course it is possible that this was a coincidence o even a hedge as the Jun 60 calls have an even lager OI but did not move surrounding this news.

This is trade analysis, not a recommendation.

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  1. Not necessarily true.

    I once read of a buyout rumor in the newspaper. Seems like I was the only fool to fall for the fake rumor. Bought deep out of the money calls. 2 days before options expiration takeover bid rumor again and stock goes through the roof ....$800 K gain on $20 K investment. No actual takeover bid ever happened.

    I should have stuck with speculation. I decided that my luck would run out so I chaned to buy and hold strategy. Lost everything in 2008 on oil and natural gas stocks

  2. Awesome investigative work!