Kraft Heinz merger: The long and short of it.
Around the 10th of March one of my subscription services flagged up unusual volumes of buying in Kraft call options. It was on my radar, but the Budget came and engrossed within it I neglected the Kraft info. On the 25th an announcement of a Kraft Heinz merger backed by Berkshire Hathaway — Warren Buffett’s company — sent the shares, and more importantly, the call options soaring upwards.
With gains of 1,800% I congratulate those who got in on the call options. Those that elected to buy shares on the basis of a special $16.50 dividend may have now overdone it. The share price carried on past the $63 plus $16.30 target to $90.61. RSI suggests that it is well overbought and this presents an opportunity as the price settles to something more sensible. I think reality will resume shortly and the price will settle closer to $80, a 10% drop. Buying put options now should see a decent downside gain.
Other overbought or oversold companies
Similarly there are those companies that have touched bottom and may now resume to the upside. My targets include Keurig Green Mountain, the coffee makers. This has touched $112 recently and is oversold. RSI and MACD also suggest this is about to turn. Green Mountain have been a favourite for a few years, and I have traded them since they were just $20.
Here there are couple of choices. Create a protected trade with shares, long term puts and sell calls each month. This can be done until Jan 2016 for a 3.1% premium, with 1.5% income each month.
Or just buy the calls now, or if you have cash cover, sell puts to create a position later.
Another is Cisco. Not a favourite like Green Mountain, the returns from regular trading tend to be low. But the business is reportedly doing well. Last quarter earnings trashed expectations and the shares jumped, finishing up over 10% in 10 trading days. Again I missed the boat last time, so have bought Cisco call options that expire a couple of days after earnings. this is an all-or-nothing punt. If the earnings call goes well, the trade will return 400%. If not, it will be worthless.
Finally Tesla. An imminent “announcement” suggests that some significant news will be forthcoming. The shares appear to have bounced off support, though with something as volatile as Tesla you just never know. Tesla fans are passionate, and the shares react to any good news. Ultimately this company could be the next Apple, or more. So news that may change the way the company is seen may really move the share price.
I am long TSLA, AAPL, GMCR, CSCO. MSFT, SUNE and AAL.
I am short BA and KRFT