Conagra Options Premiums Explode After Downgrade

Bernstein pegged "troubling" trends at Pinnacle Foods

Bernstein downgraded Conagra Brands Inc (NYSE:CAG) to "underperform" from "market perform," saying growth in frozen entrees "seems to be running out of steam." The brokerage firm also cited "troubling" trends at Pinnacle Foods, which Conagra bought earlier this year. In reaction, CAG stock is down 6.8% at $32.72 -- earlier hitting a new annual low of $32.63, and bringing its year-to-date deficit to 13.1%.

Looking closer at the charts, it's been a volatile stretch for the food stock, based on its 60-day historical volatility of 27.8% -- in the 99th annual percentile. Most of this volatility was due to an earnings-related bear gap in late September, which helped bring the shares from their mid-September highs near $38.50 to their Sept. 27 then-annual low of $32.82. CAG went on to rally all the way back up to $37.60 by Oct. 24, but has now erased these gains.

Today's downside has sparked a rush of activity in CAG's typically quiet options pits, with roughly 5,700 calls and 5,000 puts on the tape -- seven times the expected intraday amount. While the January 2019 32-strike put and 35-strike call are most active, and appear to be part of a broader spread, other speculators are likely buying to open December 33 calls for a volume-weighted average price of $1.27. If this is the case, breakeven for the call buyers at the close on Friday, Dec. 21 -- a period that encompasses Conagra's Dec. 19 earnings report -- is $34.27 (strike plus VWAP).

Meanwhile, CAG's 30-day at-the-money implied volatility (IV) of 30% is the highest its been over the last 12 months, indicating short-term options premiums are unusually rich at the moment. Plus, calls have rarely priced in higher volatility expectations at the moment, per the stock's 30-day IV skew of 3.5%, which ranks in the 6th percentile of its annual range.