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How traders turned a rumor into a quick 40% profit

Amanda Diaz
How traders turned a rumor into a quick 40% profit

Rumors of a potential mega-merger between two consumer staples (NYSE Arca: XLP) names sparked a flurry of bullish activity in the options market this week.

On Tuesday, the twittersphere was in a frenzy over speculation that soft-drink giant Coca-Cola (NYSE: KO) could potentially purchase Kellogg (NYSE: K). The gossip ignited a burst of call buying in the cereal company, with options volume on the stock trading 18 times its average daily call volume.

"Typically this name trades about 1,000 contracts a day and [Tuesday] it traded 18,000," Optimize Advisors president and co-founder Mike Khouw said on CNBC's " Fast Money ." Khouw noted that much of that activity was surrounding the July 77.5-strike calls that were purchased for around 90 cents each. These bets are targeting a move above $78.40 in the next month, or a 3 percent rise from where the stock traded Wednesday.

"On the flip side Coca-Cola saw a lot of put buyers and that's typically what you would see if there was speculation they could be the acquirer," added Khouw. "You would be making a bearish bet on the acquirer and a bullish bet on the potential target."

Khouw noted that Kellogg has been the center of attention for M&A chatter over the last several years, at one point even being eyed as a potential Buffett buy .

CNBC reached out to Coca-Cola for comment to which it responded: "Thanks for the note. As usual, please note that we do not comment on market rumor and speculation. "

Whether or not the rumors pan out to be true, those who purchased the calls were able to turn a nearly 40 percent profit in just a day — as the prices increased from 90 cents to more than $1.25.

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