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Hillshire Options Bring in the Bacon

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Published: 8 Jul 2014

Bullish options bets on Hillshire Brands Co. stand to deliver millions of dollars in profits to one or more traders who correctly wagered in recent weeks that the company's stock would surge.

Two Hillshire options trades placed last month at a cost of about $1.5 million have together posted a paper profit of roughly $43 million, based on recent prices. One bet was due to expire Friday with a $24 million profit.

The winning Hillshire bets drew attention from investors because they were made as the company's stock was reeling, and shortly before a string of buyout bids sent share prices soaring. The trader or traders appear to have passed up multiple opportunities to cash out on hefty gains.

Hillshire's stock soared 74% over the past month, as food industry rivals ratcheted up their offers for the maker of Jimmy Dean sausage. Tyson Foods Inc. won Hillshire with a $63-a-share bid this month.

"It was well-timed," said Frederic Ruffy, a strategist at Trade Alert, an options-data provider. "Those options turned into a big gain after the deal news drove the shares higher."

Traders often use options as lottery tickets in anticipation of deal news. Options can be a lucrative way to speculate because they are generally much cheaper than shares and can offer big payouts. Most expire worthless.

Well-timed options trades have been in the cross hairs of regulators who watch for signals that market players are acting illicitly on nonpublic information.

A recent study by professors at McGill University and New York University found that trading based on nonpublic information is widespread in the options market, with as many as one-quarter of acquisition target companies seeing abnormal volume leading up to merger announcements.

A study of trades made just before the announcement of merger news and expiring just after it shows the probability of such trades occurring randomly at three in one trillion, according to the study by Patrick Augustin, Menachem Brenner and Marti G. Subrahmanyam.

The most bullish trading took place on two days starting May 12, when Hillshire's stock fell 3.2% to $35.76 in reaction to the company's plan to buy packaged-foods company Pinnacle Foods Inc.

In the flurry of trading that day, one trade that cost $1 million to set up was a wager that Hillshire's stock could climb about 8% in five months.

A day later, the options activity was even more aggressive, including a trader who made a $500,000 bet that Hillshire's stock could climb 10% in one month.

Two weeks later, on May 27, The Wall Street Journal reported that Pilgrim's Pride Corp. had offered to acquire Hillshire for $45 a share, sending Hillshire's stock up 22% to $45.19.

The value of these options surged to over $10 million, but the number of outstanding options positions suggests only a fraction of the bullish options were sold for a profit. The rest of the June and October options remained open, meaning they weren't cashed in.

Two days later, Tyson Foods made a fresh $50-a-share bid for Hillshire, sending shares up another 17%, further raising the value of the options.

Again, few of the trades were cashed out, according to options open interest data. On June 2, Pilgrim's Pride boosted its bid for Hillshire to $55, sending shares up another 9.5%. Tyson's $63-a-share bid was reported on June 9.

More than 20,000 Hillshire June $40 call options expire Friday, most of which were bought on May 13, Mr. Ruffy said.

Spokesmen for Hillshire and Tyson didn't return requests seeking comment. A spokeswoman for Pilgrim's Pride declined to comment.

Credit: By Chris Dieterich 

Source Site: /desautels