Every trading day, the OptionsHouse Hotlist scans for unusual activity across the options-trading universe. The Hotlist is available for all OptionsHouse customers, including those with virtual trading accounts.
Hitting the Hotlist on Friday was cereal giant General Mills GIS. The stock saw roughly 25,000 option contracts hit the tape, compared with Thursday's volume of fewer than 7,000. A fair amount of this volume (10,529 options, to be precise) traded at the October 40 call. While the stock was trading up 25 cents at $36.90, these calls were out-of-the-money by about 8% with 35 days until expiration.
Based on our research tools, it looks as though these were call sellers trading these to close. We saw blocks of about 4,500 contracts hit the tape at this strike on Friday – one block traded for 27 cents and one for 32 cents. Assuming this is the same investor, they exited for an average price of 29.50 per call.
On Thursday, August 26, this same strike was active as a block of slightly more than 8,000 contracts traded for 20 cents apiece. This was the offer price at the time, implying the calls were bought to open about two weeks ago. This action transpired the same day that takeover rumors ignited on the consumer name.
GIS shares closed at $35.21 on August 26 so have gained nearly 5% since then. In turn, it looks as though these short-term, out-of-the-money calls have increased from 20 cents to 29.50 cents, a move of 47.5%! This is a simple demonstration of how leverage can be a huge advantage for option buyers. But remember that out-of-the-money calls are inherently risky and can quickly move south. If GIS had failed to deliver, the call buyer could have been out 100% of the premium paid.
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