Unusual Options Activity Briefing: Betting On Beer

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Includes: BUD, PRU, TAP
by: Brad Kenagy

Summary

This week there were two options trades betting on Beer stocks: Molson Coors & Anheuser-Busch Inbev.

Both trades signal a positive trend for the Anheuser-Busch Inbev/SABMiller deal.

There was a bullish bet on insurance giant Prudential.

Unusual Option Activity Briefing: Betting On Beer

During the week, I look for unusual options activity and at the end of the week; I highlight the most compelling options activity that occurred. The way I determine whether options activity is unusual is by looking for outsized trades in comparison to existing open interest for the strike purchased. I will be looking at potential catalysts that could drive the stocks I cover upward or downward towards the strike prices that the unusual options activity occurred. Once again, this week there was a number of bullish trades and no large put option trades that had large common stock downside and low open interest. When I scanned for bullish ideas this week, I got 20-60 results back per day and when I scanned for bearish ideas, I got less than 5 each day, which shows the very bullish nature of the market since the bottom three weeks ago.

Unusual Call Activity #1: Molson Coors Brewing (NYSE:TAP)

Description: Molson Coors is a brewer of beer with popular brands like Coors Light, Molson and Blue Moon. In addition, Molson Coors is in the process of acquiring a stake in a joint venture that will be divested to allow the deal between fellow beer giants Anheuser-Busch Inbev (NYSE:BUD) and SABMiller plc (OTCPK:SBMRY).

Option Activity: On Wednesday, there was a purchase of 2,450 $95 October call options for $3.35/contract. At closing that day, the stock was priced at $86.63, which means, if the stock reaches the strike price, the common stock has a potential upside of 9.66%. If the option buyer holds the options all the way to expiration, the price needed to breakeven excluding the cost of commissions would be $98.35.

Action Since Trade: Since this trade was initiated, the share price has increased from $86.63 to $88.53 at the time of writing and with that increase, the potential common stock upside has decreased from 9.66% to 7.31% if the stock were to reach the $95 strike price by expiration.

Catalyst: The biggest catalyst for Molson Coors is the finalization of the Anheuser-Busch Inbev/SABMiller deal because as part of that deal Molson Coors will gain full control of its joint venture with SABMiller. In a presentation by Molson Coors covering the aspects of the deal, it was noted they expected the deal to be 25% accretive to earnings in the first year. The following chart from that presentation shows that Molson Coors will have a larger presence in the United States compared to the current makeup of sales and operating incomes, which is more international focused. The deal between Anheuser-Busch Inbev/SABMiller is expected to close sometime in the second half of the year and with this large options trade [$820K] being in October, in my opinion, I think the deal will be done by that point, which will be a positive for Molson Coors.

[Molson Coors deal presentation]

Unusual Call Activity #2: Anheuser-Busch Inbev

Description: Anheuser-Busch Inbev is a global brewer of beer and alcoholic beverages with popular brands like Budweiser, Corona, Becks, etc. In addition, Anheuser-Busch Inbev is in the process of acquiring fellow beer giant SABMiller plc.

Option Activity: On Wednesday, there was a purchase of an April ratio call spread. The buyer purchased 4,000 April $115 call options for $3.35/contract and sold 8,000 April $120 calls for $1.45/ contract. At closing that day, the stock was priced at $113.61, which means, if the stock reaches the strike price purchased, the common stock has a potential upside of only 1.22%. If the option buyer holds the options all the way to expiration, the price needed to breakeven excluding the cost of commissions would be $115.45.

Action Since Trade: Since this trade was initiated, the share price has increased from $113.61 to $114.46 at the time of writing this and with that increase, the potential common stock upside has decreased from 1.22% to 0.47% if the stock were to reach the $115 strike price by expiration.

Catalyst: The biggest catalyst for Anheuser-Busch Inbev is clearly the completion of its deal with SABMiller. With the deal not expected to close until the second half of 2016, the April options expiration will only be impacted by deals on divestitures and asset sales from around the globe that will get this deal done. Just two days ago, BUD was in the process of finalizing a deal to sell a joint venture of SABMiller's to the Chinese partner in that joint venture. This process is being repeated in numerous countries around the world, who have concerns about the deal, which, has led to large divestitures, such as to TAP as discussed above. With all these divestitures/asset sales, a deal becomes more likely and with that clarity, the stock price of BUD should increase all else being equal.

Unusual Call Activity #3: Prudential Financial (NYSE:PRU)

Description: Prudential Financial offers financial products and services, which include life insurance, annuities and investment products and services.

Option Activity: On Tuesday, there was a purchase of 9,375 $77.50 June call options for $1.32/contract. At closing that day, the stock was priced at $70.31, which means, if the stock reaches the strike price, the common stock has a potential upside of 10.23%. If the option buyer holds the options all the way to expiration, the price needed to breakeven excluding the cost of commissions would be $78.82.

Action Since Trade: Since this trade was initiated, the share price has increased from $70.31 to $71.87 at the time of writing and with that increase, the potential common stock upside has decreased from 10.23% to 7.83% if the stock were to reach the $77.50 strike price by expiration.

Catalyst: Prudential just reported earnings and because these options expire in June, there will be one earnings report in May, which will be a catalyst. However, the more important catalyst that is influencing many stocks in the financial sector is the direction of interest rates. In my opinion, this options trade is a large bet [$1.2 million] on the direction of interest rates and the possibility of an interest rate increase in June. With the jobs report tomorrow, any number that is better than expected will once again get the talk moving towards when the Fed will increase interest rates, which will most likely send shares of banks and insurance companies significantly higher.

Disclaimer: See here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.