Looks like options traders believe one major beer maker is brewing a bargain.
Amid a quiet market and shortened trading week, options traders are yelling “Beer here!” Thursday morning they snapped up over 5,000 Anheuser Busch Inbev (NYSE: BUD) July 110 calls for $1.75.
The storied beer powerhouse has had a rocky start to the summer as the share price has fallen from recent highs above $120 to close at $110.37 after yesterday’s session. From a technical perspective, this level is important because it looks a lot like the support set this April before the rally, which could be a signal for bargain hunters to jump in.
Source: E*TRADE Pro
Owning calls fix the price where a security can be bought. The $1.75 premium puts the breakeven at $111.75, or just over 2% higher than the current price, not including commissions. The trade will become profitable if the stock crosses that level, but will have to make that move soon, as the options are set to expire in 15 days. The position will become worthless if the stock remains below $110 through that time period.
Perhaps the traders believe Bud’s new state-focused patriotic packaging announced yesterday will make a splash.1 Or perhaps they simply think this summer will bode well for brewers. Regardless, they likely hope the stock will pop, and pop before August.
Chartists will see the support around $109 and note that these traders may be trying to pick a bottom, which they also refer to as trying to catch a falling knife. And with good reason: no one truly knows what will happen next. With this in mind, the traders could be buying calls instead of buying the stock itself because the options offer more limited relative risk. The maximum this trader can lose is capped at 100% of the premium paid, which is a small fraction of the stock’s current price.
Bottom line: traders think the July fireworks will continue for one major brewer.
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1. "Budweiser Unveils New State Packaging Inspired by its 12 Local Breweries Across the Country," PR Newswire, 6 Jul. 2017. http://www.prnewswire.com/news-releases/budweiser-unveils-new-state-packaging-inspired-by-its-12-local-breweries-across-the-country-300483791.html
Important note: Options transactions are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. For more information, please read the Characteristics and Risk of Standardized Options brochure before you begin trading. Moreover, there are specific risks associated with buying options including the risk of the purchased options expiring worthless. Because of the importance of tax considerations to all options transactions, the investor considering options should consult his/her tax adviser as to how taxes affect the outcome of each option strategy. An Options investor may lose the entire amount of their investment in a relatively short time.