By Doris Frankel
CHICAGO (Reuters) - Call option activity in Kraft Foods Inc. (KFT.N: Quote, Profile , Research) surged on Thursday on speculation that Warren Buffett's Berkshire Hathaway Inc. (BRKa.N: Quote, Profile , Research) (BRKb.N: Quote, Profile , Research) is interested in the largest U.S. food company.
"There are rumors circulating this week that ... Berkshire Hathaway may be building a stake in food-maker Kraft Foods," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group. "We're unsure of the foundation of this rumor."
Shares of Kraft, known for brands including Maxwell House, Nabisco and Oscar Mayer, trade at about 18.7 times next year's estimated earnings. They edged up 15 cents, or 0.45 percent, to close at $33.84 on the New York Stock Exchange.
The company was spun off from Altria Group Inc. (MO.N: Quote, Profile , Research) at the end of March and has been developing new products that combine many of its best-known brands while ramping up marketing and cutting costs.
"We don't comment on market rumors or the specifics of our shareholder base," said Kraft spokeswoman Donna Sitkiewicz.
A representative for Berkshire Hathaway could not immediately be reached for comment.
Berkshire operates in more than 70 companies and reported nearly $90 billion of stock and bond investments as of March 31.
Buffett has said he would like to make a major acquisition that would let him deploy some of Berkshire's $46.03 billion cash hoard. He said he would be willing to part with some investments for the right acquisition.
Turnover in Kraft options was higher than usual on Thursday with a bias to the call side, indicating many investors expect further strength in the stock. Investors often use equity calls to profit from a rise in the stock price and puts to speculate on potential stock weakness.
At the close, 36,481 Kraft calls compared to 4,765 puts changed hands, far above its normal volume of 14,410 contracts, according to market research firm Track Data.
"A catalyst for this high call volume is rumors that Buffett is looking at the stock," said Joseph Cusick, senior market analyst for brokerage firm optionsXpress Inc.
Paul Foster, options strategist at Web information site theflyonthewall.com also echoed that view.
"The speculation is that Buffet was looking at Kraft and that resulted in heavy volume, with options prices being bid up as the chatter circulated this morning," Foster said.
The most notable options traded were June and July calls giving investors the right to buy Kraft shares at $35 and $37.50 a piece, respectively, within the next few weeks.
Those June $35 calls, which would be profitable if the stock rose just above $35 by mid-June expiration, traded 12,337 times and cost 35 cents a contract, up 20 cents on the day.
Analysts consider Kraft a traditionally stable stock with historic volatility of just 13.7 percent. But the speculation also sent implied volatility of the options prices to 22.95 percent or almost 1.7 times its usual reading, Wilkinson said.
(Additional reporting by Jonathan Stempel and Nicola Groom in New York)
CHICAGO (Reuters) - Call option activity in Kraft Foods Inc. (KFT.N: Quote, Profile , Research) surged on Thursday on speculation that Warren Buffett's Berkshire Hathaway Inc. (BRKa.N: Quote, Profile , Research) (BRKb.N: Quote, Profile , Research) is interested in the largest U.S. food company.
"There are rumors circulating this week that ... Berkshire Hathaway may be building a stake in food-maker Kraft Foods," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group. "We're unsure of the foundation of this rumor."
Shares of Kraft, known for brands including Maxwell House, Nabisco and Oscar Mayer, trade at about 18.7 times next year's estimated earnings. They edged up 15 cents, or 0.45 percent, to close at $33.84 on the New York Stock Exchange.
The company was spun off from Altria Group Inc. (MO.N: Quote, Profile , Research) at the end of March and has been developing new products that combine many of its best-known brands while ramping up marketing and cutting costs.
"We don't comment on market rumors or the specifics of our shareholder base," said Kraft spokeswoman Donna Sitkiewicz.
A representative for Berkshire Hathaway could not immediately be reached for comment.
Berkshire operates in more than 70 companies and reported nearly $90 billion of stock and bond investments as of March 31.
Buffett has said he would like to make a major acquisition that would let him deploy some of Berkshire's $46.03 billion cash hoard. He said he would be willing to part with some investments for the right acquisition.
Turnover in Kraft options was higher than usual on Thursday with a bias to the call side, indicating many investors expect further strength in the stock. Investors often use equity calls to profit from a rise in the stock price and puts to speculate on potential stock weakness.
At the close, 36,481 Kraft calls compared to 4,765 puts changed hands, far above its normal volume of 14,410 contracts, according to market research firm Track Data.
"A catalyst for this high call volume is rumors that Buffett is looking at the stock," said Joseph Cusick, senior market analyst for brokerage firm optionsXpress Inc.
Paul Foster, options strategist at Web information site theflyonthewall.com also echoed that view.
"The speculation is that Buffet was looking at Kraft and that resulted in heavy volume, with options prices being bid up as the chatter circulated this morning," Foster said.
The most notable options traded were June and July calls giving investors the right to buy Kraft shares at $35 and $37.50 a piece, respectively, within the next few weeks.
Those June $35 calls, which would be profitable if the stock rose just above $35 by mid-June expiration, traded 12,337 times and cost 35 cents a contract, up 20 cents on the day.
Analysts consider Kraft a traditionally stable stock with historic volatility of just 13.7 percent. But the speculation also sent implied volatility of the options prices to 22.95 percent or almost 1.7 times its usual reading, Wilkinson said.
(Additional reporting by Jonathan Stempel and Nicola Groom in New York)