There's a lot of merger and acquistion activity cooking in the meatier aisles of the financial markets these days.
The latest was Pilgrim Pride's surprise move to buy Hillshire Brands. Lots of investors with stock options profited from the $6.4 billion deal and that's leading to speculation about the next meat deal to hit the grill might be.
I spotted a very speculative column today on Barron's website by Scott H. Fullman of investment research firm, Increasing Alpha, on that topic. Fullman focused Austin's favorite Fortune 500 company and the creator of Spam, Hormel Foods, as a takeover candidate.
I have no idea if his theories make sense.
Here's some from Fullman's piece:
"Often when such an acquisition takes place, we look for other candidates. One stock seeing increased interest re cently is Hormel Foods Corp, which rose back above its 100-day moving average Tuesday and was attempting to break above its 50-day moving average, but ended the day just below it. Momentum is rising sharply and volume is higher as well.
We are seeing a slight increase in implied volatility for Hormel, even as the shares jumped. The 30-day implied volatility is up more than 0.7% for calls, and down 0.8% for puts, indicating a sharp shift in bullish sentiment.
Despite the rise, those risk premiums are still close to their 52-week lows. Clearly, other traders are having the same thought as we are.
If you are looking for a low-cost, low-dollar-risk entry, consider purchasing the Hormel July $50 calls, which are offered at 40 cents. The delta on that option, which shows the current relationship between the movement of the stock and the option, is 23%, but it is expected to rise as the call becomes closer to being at-the-money, thereby increasing the leverage of the option. If the stock rises 10% from here to $52.58, the options will be worth $2.58, for a gain of $2.18 per share, or 545%. If the shares fail to rise, you will lose 40 cents per share, or 100% of your investment.
That compares, however, to a potential loss of $1.14 for those purchasing shares if the stock reverts to Friday's closing price.
Our suggestion is to purchase an equivalent number of calls to the amount of stock you can afford to buy, thereby keeping your risk in check.