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Chinese Ag Companies Ruffle Some Feathers

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Recent options trading was of FEEDs and SEEDs.

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Two Chinese agricultural companies have seen significant price moves and surges in option volume in the past few days. But the companies aren't very similar and the option trades aren't what they might seem at first glance.

AgFeed Industries (FEED) has seen a big build in the February $5 calls as blocks of 25,000 contracts were purchased late in the day on both Tuesday and Wednesday and open interest in the strike now stands at 57,000 contracts; at around $0.80 a contract this would have a cost of about $4 million in premium and represent five million shares, which is twice the stock's average daily volume.

But before jumping to the assumption that someone is making a large directional bet, note that the CBOE reported that similar in-the-money FLEX calls were executed around the same time each day. So this position is more likely a hedge or possibly a play that volatility will continue to increase rather than strictly a bullish bet on the stock price.

AgFeed is a China-based company, that, as its name implies, provides food and fodder for farm animals. It also has its own breeding and raising of pigs for distribution to larger pork producers throughout China.

The stock had a nice bump last week, moving from $4 to around $5.50 but has since settled to trade around $5 over the past few days.

The jump in price came on the same day that Origin Agritech (SEED), which also is a Chinese-based agricultural company, jumped more than 100% from $5 to around $11 a share on news that it had one approval for genetically modified corn seeds.

I'm not sure if some investors were simply caught up in the whole China Ag play or actually mistook FEED for SEED, but while shares of the latter have continued to move higher toward the $14 level, shares of AgFeed Industries have shown no follow-through.

Another interesting note is that on the initial surge in Origin Agritech there was heavy volume in the December calls. But the action was dominated by selling. Some 11,000 contracts were sold at a mere $0.20 when the stock was around $8.30 at midday, and then the next day another 20,000 were sold around $1.50 when the stock was around $11 a share. These option trades were about 150 times the average daily volume for the stock.

Shares of Origin Agritech hit a high of $14.50 but pulled back to around $12.50 today. I think someone did some premature hedging in selling those calls and it probably contributed to creating a short squeeze.

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No positions in stocks mentioned.

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