How Kraft options traders made $15 million

Trading Desk

Talk about stacking cheddar.

Kraft shares shot up 35 percent on Wednesday on news that Heinz is purchasing a majority stake in the food company. And the biggest immediate beneficiaries of the deal may be the options traders who recently placed outsize bets on a quick Kraft rally.

In trades made on March 10, options buyers pounced on two call options: the March 62.50-strike calls, which were purchased for 35 cents, and the June 67.50-strike calls, which were purchased for 70 cents. Since call options give one the right to buy a given stock for a given price within a given time, these trades were slated to make money so long as Kraft shares rose by March 20 and June 19, respectively.

The March 62.50-strike calls expired worthless, given that the stock closed on Friday at $61.94.

But with Kraft rising 35 percent since March 10, those options expiring in June have paid off in spades. At the close of Wednesday's session, they were worth $15.60, 21 times their purchase price. In fact, given that 10,000 call contracts were bought (with each contract controlling 100 shares of stock), the trader has made some $15 million in paper profits on that part of the trade.

Those June 67.50-strike calls are by far the most widely held Kraft options strike, with open interest of 20,427 contracts going into Wednesday.

Some, like Andrew Keene of Keene on the Market, actually piled on after seeing the outsize trades.

Keene, who mentioned the Kraft activity in a March 18 " Trading Nation " video, bought 400 June 67.50 calls, but sold them on Friday for just 65 cents.

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"If I held my position to today, it would have been a $600,000 profit," the trader noted. Keene said he took off the position, along with several other upside bets, as a way to cut down on his market exposure.

The big institutional-size winning trade mirrors a suspiciously well-timed bet on Heinz ahead of that company's acquisition.

A highly profitable trade made the day before the Heinz takeout was announced yielded $1.8 million in profits and triggered action by the Security and Exchange Commission. It was revealed that the trade was indeed made based on inside information that a trader received from his brother.

After all was said and done, that Heinz trade didn't turn out to be so hot after all. The two brothers agreed to pay $3 million to the SEC to settle the charges, in addition to disgorging the profits.

Of course, options are said to be somewhat unique in that traders can lose more than they plunk down.

 

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