From TheStreet-A Big Buyer Chases Applied Materials Calls
By Dan Colarusso
Associate Editor
3/23/00 12:52 PM ET
If the predictive power of the options market holds true, something may
be cooking at Applied Materials (AMAT:Nasdaq - news - boards).
Along with other companies in its sector, the chip-equipment
manufacturer has rallied recently. It ended Wednesday's session up 6
3/4, or 6.9%, to 104 3/4.
With the stock was trading down 1 to 103 3/4 at midday Thursday,
however, one big institutional investor came to three different options
exchanges to buy calls, in size, as traders say.
Volatility IndexToday% Change23.76+3.09Source: ILXBy around 11 a.m. EST,
almost 10,000 Applied Materials April 105 call options traded,
apparently to get long the company's stock. That's size, alright, and
the buying also serves as a good, old-fashioned sign that it's likely
done by a sophisticated investor that thinks the stock could be headed
up further.
Since buying call options gives the investor the right to buy the shares
at 105 by the third Friday in April, the institution is playing for a
near-term pop in the shares.
Put/Call RatioToday (Noon)Previous Close0.350.38Source: ILX"I'd say this
was extremely aggressive buying," said Mike Riley, the specialist for
Applied Materials options on the American Stock Exchange. Riley's pit
saw about 3,700 contracts trade, while more than 4,500 traded on the
Pacific Exchange and another 1,400 on the Chicago Board Options Exchange
. "There's plenty of stock available, so we're just a little concerned."
Riley said the size and willingness to pay increasingly higher prices
for the options worry market markers because, with no earnings reports
expected or other news floating around on the company, they fear getting
blindsided by a big announcement.
By selling options, market makers put themselves in a short position and
have to hedge that appropriately with underlying stock. If a stock runs
up quickly, they're often left unable to get an appropriate hedge.
"The buying drove implied volatility up from the high 60s to the high
80s today," Riley said. Implied volatility is the annualized measure of
how much traders expect a stock to move. It increases when traders
expect a stock to move dramatically, and takes options prices with it.
Heavy demand for options will frequently have the same effect.
It certainly did in Applied Materials early in today's session. Even
though the stock was down, the April 105 call prices were rising. The
price jumped 1 1/8 ($112.50) to 9 1/8 ($912.50) on the CBOE and 2 ($200)
to 10 ($1,000) on the Amex.
Those kinds of high prices add to the cost of the investment: For the
institution to break even on exercising these options, the stock would
have to be at around 115, a level that would include the strike price
(105) plus the premium (10).
There is an outside chance that the call buying could be a hedge put on
by someone shorting the underlying shares but traders thought that
unlikely because of the sheer size of the buying.
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