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THEWEALTHYANALYST
(M/San Diego, CA)
11/17/1999 09:18 pm EST
Stock News : Options Buzz
Tales From the Pit:
Qualcomm Moves Turn
Options Upside Down
By Erin Arvedlund
Staff Reporter
11/17/99 2:19 PM ET
Welcome to the Qualcomm (QCOM:Nasdaq)
options-trading crowd. If you don't mind possibly
losing your shirt, come right in.
"We've never seen anything like this," said one
Qualcomm options market maker on San
Francisco's Pacific Exchange. "It takes big ones,
whoever's trading this thing."
"It's beyond
insanity," said
the head of one
institutional
options-trading
desk back East.
"We'd rather not touch that. If a client called and
wanted to trade this stuff, we'd probably tell them
we were restricted. No way."
Jeez. It takes one heck of a stock to actually strike
fear in options traders. Qualcomm, because of its
near-vertical movement in the past few months, is
one of them.
The way options
markets work is
that market
makers take the
other side of
client orders, and
then usually do their own transactions to stay
hedged. When a stock is moving rapidly upward,
their hedges cost more and increase the risk
involved with, in Qualcomm's case, being short
out-of-the-money calls.
Even days like today, with the stock down at one
time as much as 40 bucks to 328, don't offer much
respite. At midday, Qualcomm was trading at 341,
down 22.
When a stock moves around as much as
Qualcomm -- or Amazon.com (AMZN:Nasdaq) --
options traders have to decide just how much
they're willing to get paid to take on the risk of
trading options on that roller-coaster stock. After a
2-for-1 stock split in May, Qualcomm rocketed to
just under 300 on Nov. 5 from 90. Since then, it has
climbed as high as 395.
Pacific Exchange options traders James Burleson
and Pat Hickey with Letco, which won the
Qualcomm lead market-making spot, get paid to
determine just how afraid to be of stocks such as
Qualcomm. The stock's wild swings can be
squeezed into a percentage known as volatility,
which Letco and other options-trading firms factor in
as the key to an option price.
"The volatility in Qualcomm had been going through
the roof, but today it just collapsed" as the stock
fell from its orbit," Burleson said Wednesday. The
volatility levels were jacked up, likely because of the
influx of call-buyers who wanted to jump on the
telecom firm's bandwagon.
The call-buyers had been coming in waves. Last
Friday, Bear Stearns was rumored to be handling a
sizable options order for a customer buying
Qualcomm's November 300 calls against the
November 340 puts, a trade known as a "strangle."
The customer reportedly bought 5,000 November
300 puts and sold the 340 calls and, just one day
later, with the stock up 20 bucks, turned around
and sold the 5,000 put contracts.
However, the customer apparently is still holding
onto the 340 calls. It's also unclear if the trade was
made against a portfolio of stock. Five thousand
option contracts represent half a million shares of
Qualcomm.
For retail customers, the call options are nearly
irresistible as an alternative to actually buying the
shares.
If you're an investor who believes another stock split
could juice the price -- again -- now might be an
entry point, particularly given that volatility has
come in quite a bit. Qualcomm's board is said to be
voting Dec. 20 on the issue.
As a result, call-writers have been able to profit from
the high premiums they take in from selling the
options against a long stock position. The danger is
that they lose out on any further upside, if
Qualcomm actually gets to such rarified levels.
Those premiums were getting crushed in today's
selling. The December 350 calls, for instance, were
trading down 10 ($1,000) to 38 ($3,800), making it
considerably cheaper to get long Qualcomm via the
options than it would have been yesterday.
"What's really scary is that the volatility is getting
decimated," said Burleson, and that affects prices
of both puts and calls.
He said the firm had bought some November 340
puts for 7 3/8 ($737.50), which expire Friday. "In 30
minutes, they decayed $3." By midday, though, the
stock's drop had pushed the contract's price up 3
3/4 ($375) to 9 1/4 ($925).
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