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Monsanto (MON) LEAPS call action shows a bet on a rally

Posted
6/30/2010 7:03:00 PM
By: Jud Pyle
Referenced Stocks:MON

A positive earnings announcement from Monsanto Co. (NYSE: MON ) can't seem to keep the stock in the green on Wednesday, but at least one investor appears to have taken a bullish stance by loading up on long-dated call options.

MON shares were down 85 cents, or more than 1%, to $46.48 during afternoon trading. Ahead of the bell today, MON announced earnings of 81 cents per share, beating estimates by one cent, and reaffirming its 2010 fiscal year guidance (lower than analysts' estimates). The company also said it launched a new warrant herbicide today for cotton and soybeans. It looks like the earnings news is putting pressure on the stock, but heavy call volume suggests at least one investor expects an upturn in the shares during the next year and half.

Looking at the January 2012 60-strike calls, we see that more than 11,000 of them have traded all day long. At approximately12:17 p.m. EST, several large blocks of these calls traded for a price of around $4.15. Looking just at the breakevens of this trade at expiration, we know that the shares must be higher than $64.15 in order for the trade to be profitable. But these options could rally prior to expiration, and the investor could choose to sell out of the options well before expiration. Currently, the options have a delta of roughly 35. That means that for every $1 the shares of MON rise, the options will appreciate roughly 35 cents, or 8.4% of the original investment.

The catalyst for this call purchase might be a levered bet that MON will switch course and change from its losing ways. 2010 has been a brutal year for the shares, as they are down more than 40%, compared to the S&P down less than 10%. This investor could be thinking that with a P/E of less than 15 times analyst estimates, these calls are fair way to gamble that MON could be due for a relief rally.

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