Why This Massive Anheuser Busch Option Trade May Be A Bearish Hedge

Anheuser Busch Inbev NV BUD shares are up 6.1% since the company reported earnings July 25. One large option trader is making a big bullish bet on more upside for Anhueser Busch on Monday, but the size of the trade suggests it may actually be a bearish hedge.

The Trade

On Monday morning, Benzinga Pro subscribers received an option alert due to an unusually large Anheuser Busch trade.

At 9:24 a.m., a trader bought 15,000 Anheuser Busch call options at a $90 strike price that expire on Jan. 17, 2020. The calls were purchased at the ask price of $14.35 and represent a $21.52 million bullish bet that Anheuser Busch shares will reach at least $104.35 within the next six months.

Based on Monday morning’s prices, Anheuser Busch would need to gain just 3.1% in the next six months for the trade to be profitable.

Why It’s Important

Due to the relatively complex nature of the options market, options traders are generally considered to be more sophisticated than the average stock trader. In addition, large options traders are often professional, wealthy individuals or institutions, either of which could have unique insight or information about a company. Even traders that stick exclusively to stocks watch the option market closely for unusual trading activity as an indicator of where the “smart money” is focusing.

Unfortunately, because stock investors often use put options to hedge larger bullish stock positions, there’s no way to be 100% certain whether an option trade is a standalone purchase or a hedge against a stock position.

In this instance, given the massive $21 million size of the Anheuser Busch trade, it’s very likely the trader was an institution. It’s also likely the call purchase was a hedge on a large short stock position in Anheuser Busch. In that respect, the trade may not be as bullish as is appears on the surface.

What's Next

The big Anheuser Busch trade comes less than a week after the company reported 2.1% volume growth in the second quarter, its highest growth in more than five years. Organic revenue growth was 6.2%, suggesting the company’s business is firing on all cylinders heading into the second half of the year.

Anheuser Busch also announced earlier this month it's tackling its debt problem by selling its Australian business for more than $11 billion as part of its goal to get its net-debt-to-normalized-EBITDA ratio down from 4.61 at the end of 2018 to below 4 by the end of 2020.

Assuming Monday’s call buy was a hedge on a short position, the institution may believe the big quarter, asset sale news and 54% year-to-date gains are as good as it gets for Anheuser Busch in the near term.

The stock traded around $101.66 per share at time of publication.

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