Kraft Options Suggest Massive Straddle

Kraft Foods (KFT) stock options saw another day of heavy trading on Thursday with nearly 319,000 contracts changing hands. The activity mirrors that of Wednesday when more than 182,000 contracts traded hands with a focus on the 35 August ‘08 contracts. Trading on both sides of the line - both calls and puts - along with large block trades suggest that a single purchaser may have been trying to establish a straddle position on Kraft Foods stock.

The options activity on Thursday involved 274,866 calls and 277,975 puts, which suggests a similar straddle at much greater stakes. The put portion of today’s action alone costed traders over $95 million with the call portion costing an additional $2.7 million to establish. These trade’s suggest that Kraft’s stock would have to fall past around $30.50 or advance past $35.00 in order to break-even. The big bet (most expensive) is that Kraft heads to the downside.

Currently, Kraft Food’s stock is trading at just $31.82, which means that the lower end of this boundry is most likely to hit. Moreover, there is a lot of downside pressure on the stock from analysts and bearish sentiment by the market in general. The calls in this trade are likely in place as a kind of insurance policy designed to protect against a sudden move higher due to, say, Warren Buffett announcing an increased stake in the firm.

In the end, the options activity this week suggests that some large investors are placing a straddle on Kraft Foods. Straddle plays rely on sizable moves in either direction in order to make money. And many analysts, such as Mark Fightmaster who broke the story Wednesday for Schaeffers Research, are speculating that the recent activity is biased towards the downside. Regardless, it is a situation that the rest of the market will be monitoring.

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