Unusual Stock Options Volume Shows the Smart Money Prepping for a Recession

While the internet undoubtedly represents one of the greatest achievements of mankind, the effective decentralization of information hasn’t always been holistically productive. Combined with the advent of social media, it’s never been easier for anybody with public sway to influence tens of thousands of investors. Therefore, if you are going to align your portfolio with other entities’ strategies, you should do so with the best and brightest institutions.

Fundamentally, then, it’s intriguing – and a bit worrying – that unusual activity in the options arena picked up for consumer staples giant General Mills (GIS). Perhaps best known for owning the Cheerios cereal brand, General Mills represents an everyday commodity across U.S. and global households. As well, the company provides other food products that cater to a variety of consumer demographics.

However, GIS stock rarely offers much excitement. Necessity doesn’t always spell a compelling investment. Indeed, when something is ubiquitous, people take that underlying product or service for granted. It’s only when an unpleasant circumstance occurs that we tend to truly appreciate consumer staples. And one of those circumstances is a brewing recession.

Whether an economic downturn materializes or not, only time will tell. However, it’s intriguing that two factors ring true. As I’ll explain below, GIS stock picked up significant activity in the options market. Second, hedge funds have also gradually increased their position in General Mills.

In the first quarter of 2021, there were 32 hedge fund positions in GIS stock. By the latest read of Q3 2022, this metric increased to 40.

The targeting of both options traders and hedge funds toward GIS stock may be significant. Particularly for the latter industry, we’re dealing with institutions that have access to the smartest analysts and the most informative analytics. While hedge funds don’t always get it right – see meme stocks – over the long run, their performance likely rates much higher than the average lay investor.

GIS Stock and the Spike in Unusual Options Activity

Following the close of the Dec. 12 session, GIS stock represented one of the highlights in Barchart.com’s screener for unusual stock options volume. This metric shows the difference between the current volume and the average volume over the past month. Usually, traders leverage this data to ascertain which stocks may be due for big moves ahead.

Specifically, GIS’s volume hit 27,746 contracts against an open interest reading of 100,978. Call volume hit 26,148 versus put volume of 1,598. The implied volatility (IV) rank hit 35.91%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.

To quickly summarize, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.

The IV low for GIS stock was 16.08% on Dec. 31, 2021. A few months later on March 8, GIS hit its IV high at 33.38%. Prospective investors should note that per Barchart.com’s technical analysis gauge, GIS ranks as an average 100% buy. In the open market, shares of General Mills gained over 29% of equity value. For context, during the same period, the S&P 500 index slipped nearly 17%.

Focusing on Inelasticity

While GIS stock decidedly carries a boring profile, the surge in uncharacteristic interest – both among traders and major institutions – implies that the smart money is gradually accepting reality. Based on all the evidence, it may be more likely that the economy slips into recession than not. Therefore, astute investors are positioning themselves in companies that benefit from inelastic demand.

Perhaps most prominently, Walmart (WMT) gave a clear signal that the market is far less healthy than many observers realized. In August of this year, CEO Doug McMillon stated that even wealthier families were penny-pinching. If so, consumer discretionary sales for the broader retail sector can quickly dry up. About the only place to see gains may be in the consumer staples segment.

To be clear, there’s no guarantee that GIS stock will fly higher from here. Still, at the most cynical level, humans require a minimum amount of calories to live. Therefore, households will sacrifice every other purchase before they dip into their food budget.

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