March 25, 2015 / 6:45 PM / 4 years ago

UPDATE 1-Windfall in options trade in Kraft-Heinz deal

(Adds SEC, FINRA comment)

By Saqib Iqbal Ahmed

NEW YORK, March 25 (Reuters) - One trader’s bullish bet in Kraft Foods Group Inc’s options is set to turn a $700,000 bet into a possible paper profit of as much as $19 million.

The company’s proposed merger with ketchup maker H.J. Heinz Co sent shares of the maker of Velveeta cheese up by more than 40 percent - but the gains pale in comparison to the jump in the value of its options.

Kraft Foods’ shares jumped as much as 43 percent to an all-time high of $87.88 on news that the company would merge with the ketchup maker, owned by 3G Capital and Warren Buffett’s Berkshire Hathaway Inc, to form North America’s third-largest food and beverage company.

Notable bullish trading in Kraft options prior to the deal was limited. But on March 10, someone bought a 10,000 lot of Kraft call options, usually used for placing bullish bets on the stock, for 70 cents. The calls were set to expire on June 19 and were betting on the shares rising above $67.50 by that date. The shares were $61.65 at that time.

Since each options contract represents a 100 shares of the underlying stock, the trader would have paid about $700,000. On Wednesday, the options traded as high as $20.10, according to Thomson Reuters data.

“It might be nothing more than lucky timing. On the other hand, news of the deal might have been leaked and motivated the call buying in Kraft,” said Fred Ruffy, options strategist at WhatsTrading.com.

With the exception of that March 10 trade, activity in Kraft’s options in recent months does not appear to be out of line from where it was in previous months, said David Hait, president of OptionMetrics in New York.

Kraft is not the only company to attract bullish activity over the last few weeks. Options on food and beverage companies such as Campbell Soup Co, PepsiCo Inc and Coca-Cola Co have also seen a surge in bullish options bets.

Options activity has been known to spike before the public announcement of deals and the U.S. Securities and Exchange Commission has in the past announced enforcement action for alleged insider trading involving options trading.

The Financial Industry Regulatory Authority, which oversees securities firms, did not respond to a request for comment. A spokeswoman for the U.S. Securities and Exchange Commission declined to comment. (Reporting by Saqib Iqbal Ahmed; Editing by Bernard Orr)

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