How traders turned a rumor into a quick 40% profit

Rumors of a potential mega-merger between two consumer staples names sparked a flurry of bullish activity in the options market this week.

On Tuesday, the twittersphere was in a frenzy over speculation that soft-drink giant Coca-Cola could potentially purchase Kellogg. The gossip ignited a burst of call buying in the cereal company, with options volume on the stock trading 18 times its average daily call volume.

"Typically this name trades about 1,000 contracts a day and [Tuesday] it traded 18,000," Optimize Advisors president and co-founder Mike Khouw said on CNBC's "Fast Money." Khouw noted that much of that activity was surrounding the July 77.5-strike calls that were purchased for around 90 cents each. These bets are targeting a move above $78.40 in the next month, or a 3 percent rise from where the stock traded Wednesday.

"On the flip side Coca-Cola saw a lot of put buyers and that's typically what you would see if there was speculation they could be the acquirer," added Khouw. "You would be making a bearish bet on the acquirer and a bullish bet on the potential target."

Khouw noted that Kellogg has been the center of attention for M&A chatter over the last several years, at one point even being eyed as a potential Buffett buy.

CNBC reached out to Coca-Cola for comment to which it responded: "Thanks for the note. As usual, please note that we do not comment on market rumor and speculation. "

Whether or not the rumors pan out to be true, those who purchased the calls were able to turn a nearly 40 percent profit in just a day — as the prices increased from 90 cents to more than $1.25.

Latest Video

  • The Final Call: MCD & QQQ

    CNBC's Melissa Lee and the Options Action traders discuss the stocks they'll be watching next week.

  • Trouble ahead for Twitter

    The social stock sinks. Is there more trouble ahead for Twitter? With CNBC's Melissa Lee and the Options Action traders, Carter Worth, Mike Khouw and Dan Nathan.

  • Fade the staples rally?

    Consumer staples soar. Should investors fade the staples rally? With CNBC's Melissa Lee and the Options Action traders, Carter Worth, Mike Khouw and Dan Nathan.

Tutorials

Host Bio

  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

Options Action Traders

From Our Sponsor

Sign Up for Our Newsletter Options Action

Insight directly from the members of our Options Action panel
Get this delivered to your inbox, and more info about about our products and services.
By signing up for newsletters, you are agreeing to our Terms of Use and Privacy Policy.