As Conagra bids for Pinnacle, the options market suggests other soup and cereal mergers are coming

Shares of soup and cereal stocks have been hammered of late, on fears of rising rates and changing consumer tastes. Now, with many of these stocks at multiyear lows, some traders are banking on the calculus that two negatives will make a positive and that many of these troubled companies will look to merge.

On Wednesday, Conagra agreed to buy Pinnacle Foods for more than $8 billion in cash and stock. According to the options market, this deal can be the first of many in the space.

Over the last few weeks, the options market is seeing some unusual flows around consumer staples names that could suggest more marriages of some of the biggest and best-known brands.

Soup, pasta and frozen food

Several recent reports have highlighted potential merger discussions between Kraft Heinz and Campbell Soup, in addition to the confirmed deal between Conagra Brands and Pinnacle Foods.

Meanwhile, the options market has been seeing upside call buying in Campbell Soup, Pinnacle Foods, Hain Celestial and Hormel Foods. What’s interesting about upside call buying, relative to other options trading, is if an investor has a long position in a stock, one would typically sell upside calls, for an overwriting position.

On the other hand, an investor may choose to buy upside calls on a stock if they are short that name.

In other words, if we see the purchase of an upside call, particularly if there is no position in the stock, this may suggest an investor is expressing a belief that they think the stock could pop, rather than a slow grind higher.

What to watch

The most important thing to watch, in this case, is what the options are implying in terms of the probability of a sudden spike. If an investor disagrees with the market’s implied probability of what a stock will do, then purchasing options may be an attractive alternative to buying the stock outright.

Remember, just because there is upside call buying, this does not mean there is imminent M&A. What I’m highlighting here, specifically, are the flows we are witnessing. This could all reflect investor speculation around potential coming events like a takeover or a merger, or something more company-specific, which could result in a rising price in the coming weeks.

Disclosure: Susquehanna Financial Group is a market maker in Pinnnacle Foods, Campbell Soup, Hormel Foods and Kraft Heinz.

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