Large Mondelez Option Strangle Trade Suggests A Major Earnings Move Is Coming

Mondelez International INC MDLZ shares traded higher on Tuesday and have more than doubled the overall return of the S&P 500 in the past year. As the food giant gears up for earnings on Tuesday afternoon after the close, Mondelez has certainly gotten at least one large option trader’s attention.

Unfortunately for Mondelez traders, it appears the large option trades are a bet on volatility rather than direction.

The Trades

On Tuesday, Benzinga Pro subscribers received four option alerts related to unusually large trades of Mondelez. Two of the largest trades in particular stood out:

• At 10:07 a.m., a trader bought 714 Mondelez call options with a $55 strike price expiring on Friday near the ask price at 46 cents. The trade represented an $32,844 bullish bet.
• Almost simultaneously, the trader bought 714 Mondelez put options with a $50 strike price expiring on Friday near the ask price at 34.5 cents. The trade represented an $24,633 bearish bet.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively small size of the Mondelez option trades by institutional standards, they are unlikely to represent hedging.

Big Earnings Move Ahead?

With earnings just a couple of hours away, Mondelez traders have a little more side to join the bull or bear camp before the report. However, there is a third option.

Tuesday morning’s option trades represent a textbook long strangle trade. A strangle is an option trading strategy in which a trader buys equal amounts of out-of-the-money calls and puts in a single stock with the same expiration date. The idea is the trade will only be profitable if the stock makes a large move in one direction or the other.

A strangle is a market neutral trade in that it doesn’t matter if the large move is up or down, as long as its magnitude is large enough. The downside to strangle trades is that stocks often have to make extreme moves for a strangle to end up profitable.

For example, the Mondelez calls purchased on Tuesday have a break-even price of $55.46, suggesting the stock would need to gain 4.7% for that half of the trade to be profitable. At the same time, the puts have a break-even price of $49.65, suggesting the stock would need to drop 6.1% for that half of the trade to be profitable.

Unfortunately, the stock can’t move in both directions at once, meaning half of the trade will ultimately expire worthless no matter what.

Given that both sides of the strangle trade start off out-of-the-money, little or no price reaction to earnings in either direction can easily result in the entire trade expiring worthless.

Benzinga’s Take

For the strangle trader to turn a profit, Mondelez shares will need to react extremely strongly to earnings. The overall break-even price for the strangle trade on the upside is $55.805 (+5.4%) and on the downside is $49.19 (-7.0%).

According to Optionslam.com, Mondelez’s seven-day implied movement based on the weekly options market is 4.9%, which wouldn’t be a large enough movement in either direction for the strangle trade to pay off.

The stock stock around $53 per share at time of publication.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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