Volume Spike Investor

This week has seen a surge in trading in stock options in Kraft Foods Inc. (NYSE: KFT).  The food giant has never been this active in memory.  But oddly enough these transactions may be an inefficiency that exists rather than massive gambles. Take a look at the open interest as of yesterday now:

OPTION (Mo/STRIKE)             Volume    OpInt
KFT AUG08 $35.00 CALLS     32,060    366,121
KFT AUG08 $35.00 PUTS       37,010    373,031
KFT AUG08 $37.50 PUTS       20.806    23,002

You can bet there are some speculating here, but it looks like the huge trades have been put on to capture roughly $0.10 in profit per contract.  We have heard several explanations for the increase in options trading, but it appears that selling straddles in a non-directional trade is the most plausible.

As a reminder, when you see an open interest in the same month of 366,000 contracts in the same month, that is representative of more than 36 million shares on a fully leveraged basis.

JON OGG
July 31, 2008