Traders score big on $BUFF deal

Bullish option traders posted a huge windfall in Blue Buffalo Pet Products on acquisition news today.

On Jan. 31, Investitute’s proprietary programs cited the purchase of 3,800 March $32.50 calls for $2.25 to $3.10 with shares at $33.89. These were clearly new positions, as open interest in the strike was only 571 contracts before the activity appeared.

Those calls traded for $8.26 today, more than 3.5 times their original purchase price. The stock rose 17.9% in the same time frame, illustrating how options can far outperform their underlying shares.

Long calls lock in the price where a stock can be purchased, gaining with a rally and providing leverage to the underlying shares. The contracts can quickly lose value if the stock stalls or pulls back but also carry less risk than owning the shares themselves.

BUFF surged 17.23% today to close at $40 even. This morning General Mills announced that it is buying the pet-food company for $8 billion in cash.