Food and beverage stocks draw buy-write strategy

A number of food and beverage stocks appeared to be the subject of buy-write or covered call strategies on Friday as option players looked for opportunities in a weak market environment to earn income, one analyst said.

A buy-write strategy entails the purchase of a company's shares and a simultaneous selling of the equity's call options, which give buying rights to the company's stock. It is often viewed as a bullish strategy.

"The interest in buy-writes on food and beverage names might be based on the view that even if the economy continues to deteriorate, consumer demand for food and beverages will remain," said Frederic Ruffy, options strategist at WhatsTrading.com.

During Friday's session, Ruffy said blocks of stock and short call options were traded in Coca-Cola Co (KO.N), Pepsico Inc (PEP.N), HJ Heinz Co (HNZ.N), Kraft Foods Inc (KFT.N), and Kellogg Co (K.N).

In Coca-Cola, a block of shares changed hands along with January 2010 $47.50 calls, and in Pepsico, a block of shares traded with January 2010 $60 calls.

Heinz, which attracted a second day of increasing options activity, also had possible buy-writes. Its January $40 calls turned active as 9,000 of these strikes were sold for a $1 premium and not long after, a block of 230,000 Heinz shares traded for $32.10, Ruffy said.

Similar action was seen in Kraft involving its January call options at the strike price of $27.50 as a block of stock was acquired. And in Kellogg, the January 2010 $45 strike calls were sold with another block of shares, Ruffy said.

Ruffy said traders who have a bullish longer-term view on these companies, through January 2010, appeared to be offsetting some of the cost of buying shares by selling call options.

Under a buy-write strategy, in a sideways market, the call options expire worthless and would bring in income.

In a rising market, the covered calls establish a selling price above the current stock price, and in a declining market, the call premium received, provides a limited amount of downside protection for the acquired shares.

By Doris Frankel

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