Options Strangles Abound in Food Stocks

Some traders are positioning for turbulent share price action in the continent's largest produce distributor. Shares in Sysco (SYY - commentary - Cramer's Take) are down 1.2% to $29.89 this afternoon, days after the franchise yanked Florida-grown tomatoes implicated in a recent salmonella scare and began sourcing its tomatoes from FDA-cleared Georgia. It's possible that the outlook for a salmonella-driven decline in earnings may conspire with higher distribution costs to dent Sysco shares.

Implied volatility in all Sysco options currently ticks in at 23% -- about a 25% elevation above the historic reading, showing a higher-than-normal risk premium being priced into its options. One trader is looking for this risk outlook to intensify heading into the fall, positioning long the November 27.50/32.50 strangle for a premium of $2.20. The position covers the trader in the event of a break above $34.70 to the upside or below $25.30 to the downside -- either of which would penetrate Sysco's respective high/low for the past 52 weeks. A buyer of the long strangle is essentially saying, "Tomayto, tomahto" -- either way, this stock is going to move. Sysco shares are down 4% for the year to date, having traded as high as $35.25 over the past year. The number of options involved in this long strangle sent overall volume to more than 5 times the level of activity seen in Sysco in a normal session.

Yesterday's soggy decline out of Chiquita Brands (CQB - commentary - Cramer's Take) followed a revision to its earnings guidance that had the company forecasting a "significant loss" for 2008. Today's backtrack by the banana maker has the company forecasting a third-quarter loss "roughly in line" with last year's numbers. While Chiquita's share price has firmed up 6% to $17.69, we notice that traders are still sitting tight on those positions in August 17.50 puts, which traded at twice the open interest yesterday.

As for this afternoon, options in Chiquita are trading at 5 times the normal level, with an interesting 3,500-lot play in the January contract. It looks like a trader here either sold short the January 15/20 strangle for $3.70 (suggesting he or she is confident in the company's heavily asterisked forecast) or is using a short collar to protect a short position in Chiquita stock (suggesting strong doubts in the outlook for in-line losses). Chiquita has traded as low as $13.31 over the past 52 weeks.

Finally, it seems that option traders are feeling decidedly un-cola. At any rate, it's been a most un-effervescent few sessions for soft drink bottlers, ever since Coca Cola Hellenic Bottling (CCH - commentary - Cramer's Take) slashed its full-year guidance last Friday due to high commodity costs and laggard economies in its key markets. Shares in Pepsi Bottling Group (PBG - commentary - Cramer's Take), the international distribution arm of the Pepsi (PEP - commentary - Cramer's Take) group, quickly followed suit on Monday with a 4% drop to $29.45, setting a new 52-week low as option traders established fresh positions in September 30 calls in excess of Pepsi Bottling Group's entire open interest.

The bearishness continued unalloyed today with traders turning to protective positioning in big red Coca-Cola Enterprises (CCE - commentary - Cramer's Take). Shares are at a 52-week low on a 1.2% decline to $18.34 today, and it looks like the pain will continue. Meanwhile, the eightfold increase in option trading volume picked up by our scanners today showed fresh long positioning at the November 20 put line at $2.20 a contract -- a position requiring another 60-cent drop to the downside just to break even in November.

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At the time of publication, Darst had no positions in the stocks mentioned.

Rebecca Engmann Darst is an equity options analyst for Interactive Brokers in Greenwich, Conn., and is the author of its daily "Options and Futures Intelligence Report." Each Thursday at 6:30 a.m. EST, she delivers the early-morning lowdown on option volume and sector trends on CNBC's "Squawk Box." She also appears on BNN Canada and has been a guest on Fox News' "Your World With Neil Cavuto."

Prior to her work in the equity options market, she spent seven years in Scandinavia as a Copenhagen-based chief reporter for a European Commission news service, correspondent for Spanish daily El Mundo and Radio Netherlands, followed by stints at Nordea Bank and Saxo Bank.