What appears to be irrational buying of "call" options often hints of a coming corporate event or a pending takeover.
Shares of agribusiness Bunge (BG, Financial) have been strengthening since carving out a sickening nadir near $46 as the whole market bottomed on Feb. 11. Bunge closed at $64.58 on May 24.
Normally, a 40% move would make a stock look expensive. Bunge was down from $93, though, and earnings have been headed higher. The firm trades for just 12.3x its forward estimate of $5.20 for 2016, versus a normalized multiple closer to 15x.
By 1:30 p.m. there was already signficant buying in Bunge’s July $65, $67.50 and $70 calls. The daily volume on the $65 strike ended up growing to 135 contracts by 4 p.m. What really caught my eye was the action in the $67.50s. Today's volume of 800 contracts exceeded the entire previous open interest of 657.
The final trade on those went off at $1.40 per share putting the break-even point at $68.90 on options due to expire in only 52 days. A total of 439 contracts on Bunge’s July $70 calls changed hands for as high as 65 cents.
Somebody is betting on a continued nice pop before July 15.
I’m a fan of Bunge on fundamentals. Tuesday’s closing quote offered the second-best yield (2.36%) since 2009 and an overall valuation that looked similar to the previous best entry points (green-starred below) of the last six years.
There’s plenty of room for further improvement. Bunge touched peaks of $74 to $93 during each of the six calendar years from 2010 to 2015. The present price is actually lower than the lows during all of 2013 through October of 2015.
Standard and Poor's research officially categorizes Bunge in the neutral zone. That’s inconsistent with its quantitative outlook, which places Bunge among the most undervalued companies in S&P’s entire research universe.
The nonemotional fair value estimate sits at $82.50, 28% higher than Tuesday's final quote. Bunge's shares also rank well above average in terms of overall quality.
My portfolio is loaded up with Bunge purchased earlier and at lower levels. I’d be thrilled to see a quick move up as suggested by the options’ action. I feel confident, though, that I’ll see $75 to $90 again in the reasonable future even if nothing unusual is brewing.
Investors who hate to chase, even at decent valuations, can still make a low-risk, decent return play on Bunge via the sale of Jan. 19, 2018, expiration date puts.
Late today I was able to capture $9.10 per share premium ($910 per contract) for committing to take Bunge at a net cost of just $55.90.
The best-case scenario on this option sale would be keeping 100% of all premium received without ever having to buy the shares. The $65 strike price is less than 1% above where the shares are trading right now.
The worst-case result would be forced purchase of 100 shares, per contract sold, at a cost basis seen only briefly over the past five years. I’ll be happy either way.
We’ll know by mid-July whether the "smart money" really knew if a major news event was truly pending.
Disclosure: Long Bunge shares, short Bunge puts.
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