Bulls not chicken in major food stock
05/12/17

Can chickens fly? Some traders seem to hope so.

Pilgrim’s Pride (NASDAQ: PPC) is usually a sleepy name in terms of options activity, averaging well below 1,000 contracts per session the last month. (Big names like Apple (NASDAQ: AAPL) and Bank of America (NYSE: BAC), in contrast, normally turn over more than 200,000.) But yesterday PPC’s volumes seemed off the chart, led by a surge of buying in its June 25 calls.

Traders began about an hour after the opening bell, paying $0.40 for small blocks. They continued pecking away at larger blocks, lifting premiums to $0.50, then $0.60 as the shares took flight. More and more calls were gobbled up until premiums hit $0.95. Over 23,000 contracts changed hands by the end of the session.

Calls fix the price where and when investors can buy a security. Traders can wet their beaks before a potential move, without keeping lots of money cooped up in a stock that’s not performing. PPC closed at $24.82 yesterday. Say it keeps running into next month and finds itself at $26 on the third Friday of June; those calls will be worth $1. A move to $27 will lift the options to $2 and a close at $28 will result in a $3 value. Breakeven is between $25.40 and $25.95. They’ll become worthless if PPC doesn’t break $25.

Pilgrims Pride (PPC), 6-month chart

Source: OptionsHouse by E*TRADE

The poultry farmer is already up 31 percent this year, which makes the S&P 500’s 7 percent gain over the same period appear downright paltry in comparison. PPC started climbing in February after management brightened an earnings miss by saying demand was improving.1 The shares steadily advanced in the following months and got another bump on April 21 after analysts at Vertical Research said rising meat prices will send them to $30.2 Thursday’s call buyers stepped in as the stock pulled back from that bullish call. 

The company has also predicted it will benefit from the onset of summer grilling and cost cuts following its purchase of GNP Co., a private company based in Minnesota.3

When it was all said and done, PPC’s total option volume was more than 30 times the monthly average. Calls outnumbered puts by a bullish 20-to-1 ratio.

In summary, PPC has pulled back following a rally, but some traders think there's still meat on the bone.

 

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1. Seeking Alpha: Pilgrim's Pride bid up on positive outlook. 2/9/17.

2. Seeking Alpha: Pilgrim's Pride +10% after Vertical upgrades. 4/21/17.

3. Pilgrim's Pride: Pilgrim's Pride Reports Operating Income of $152 Million and Operating Margin of 7.5% for the First Quarter of 2017. 5/3/17.