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Hershey bid yields millions for lucky options traders

Traders who jumped on Hershey acquisition rumors are reaping huge rewards Thursday.

Hershey's shares soared Thursday morning, off of reports that Mondelez had made a bid for the chocolate company. And that was very welcome news for a few fortunate traders who bet big on the stock earlier this month.

On June 9, an unsubstantiated rumor that Nestle (rather than Mondelez) was set to bid for Hershey was attended with a flurry of bullish options purchases. In particular, more than 15,000 of the July 100-strike calls were purchased that day, and 6,000 of the June 100-strike calls were bought.

According to the analysis of options expert Dan Nathan, many of those calls appear to have been purchased by the same firm, perhaps in the neighborhood of 11,000 contracts. Since those calls cost about $1.10 per share that day (or $110 per contract) and traded above $17 on Thursday morning, a purchase that large would have yielded a monster profit of $17.5 million on paper.

It is ironic to note that not all purchases of the Hershey calls yielded profits. The June calls did not capture the time period in which the news emerged, and those options expired worthless.

"When you're speculating on an event you cannot predict, you have to get a lot of things right — the direction of the move, the timing and the magnitude of the move," Nathan, of RiskReversal.com, commented to CNBC on Thursday.

More generally, while this is the story of a trade that returned about 1,500 percent, Nathan warns that "if you chased every rumor and you committed options premium to every rumor, your winners would be hard-pressed to make up for the losers."

Interestingly, there are some losers here as well — namely, the dealers who sold those options. Since the volume that traded that day was so great compared to the overall depth of the market for Hershey's options, it would have been especially hard for the dealers who sold those options to hedge their exposure, Nathan pointed out. That means they are likely booking a large loss Thursday.

At the time, Hershey said it refused to comment on market rumors. On Thursday, Mondelez said it does not comment on market rumors or speculation, and Hershey did not respond to CNBC's request for comment.

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  • Melissa Lee

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

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