thestreet.com article. Looks like someone wants to buy ASND in the 40s
thestreet.com
Options Buzz: Whispers of Ascend-Stratus Deal Perking in Options Market
By Dan Colarusso
Senior Writer
7/29/98 1:37 PM ET
If you buy the notion that options traders are whiling away
a summer session with chit-chat about Mark McGwire or
ruminations on Monica Lewinsky, think again. New York
traders are whispering about the possibility that Ascend
(ASND:Nasdaq) is making a run at Stratus (SRA:NYSE).
From today's nondescript volume in the options market, it
would be easy to assume we're seeing another day of
quiet hedging of long stock positions. The talk today,
however, is pointing to Stratus, even though call volume
on the company isn't exploding into four-digit territory.
At around noon, Stratus was up 2 9/16 to 25 5/8 and its
August 25 calls had traded about 100 contracts against
open interest of 483. The price of the contract was up 1
1/4 ($125) to 2 7/16 ($243.75), showing strong interest.
The August and September 22 1/2 calls posted volume of
90 and 50 contracts, respectively.
Now, while the volume numbers are nowhere near the
amount of speculation traders would see on more popular
and more active options, the smart money was watching
closely. "The volume on that company today is
extraordinary compared to how much it usually trades,"
said one options firm strategist. "And it's nothing
representative of what is waiting to trade." Stratus' average
daily options volume for June is 597 contracts, according
to a Pacific Exchange spokesman.
When options prices rise quickly on a particular issue, the
crowd may not be able to quickly accommodate all the
orders coming down from member firms. When that
happens, order flow gets held up as the haggling
intensifies. That seems to be what's happening in Stratus
today, traders said.
On a fundamental basis, the acquisition would help
Ascend compete with other equipment makers such as
Cisco (CSCO:Nasdaq), according to Dennis Diamond,
director at Key Asset Management. He said he hadn't
heard the rumor, and declined to disclose his firm's
holdings.
Stratus' product is "something different that none of the
other equipment makers can offer," Diamond says.
Ascend might sell Stratus' servers to telephone carriers
along with its highly successful switches.
"I think if Ascend is going to remain independent, they
need to go out and make a few acquisitions" to bolster the
product portfolio, Diamond says. Ascend itself has long
been rumored to be a takeout target of Lucent
(LU:NYSE).
Stratus recently announced that it would take a $20
million charge and cut its workforce by 15%.
Ascend options weren't showing any significant volume
trends as the stock was down 3/8 to 50 5/16 at midday.
The implied volatilities on Cisco options are staying
stubbornly high with earnings just a week away, floor
traders said today.
Cisco, down 1 3/16 today, is expected to report earnings
next week and traders have been positioning themselves
on both puts and calls. What has traders wary, however,
is the level of implied volatility -- the measure of the
expected trading range of a stock -- above 45. "Volatility
on the near-term options is in the mid-40s," said James
Burleson, a trader on the Pacific Exchange, where about
10%-15% of Cisco volume gets done. "It hasn't been this
high in a year or a year-and-a-half."
Volume trailed off some today after a busy Tuesday
session, when 2,100 of the August 100 calls and 1,000 of
the August 95 calls traded, mostly on the Chicago
Board Options Exchange. Halfway through today's
trading, only the August 100 calls showed any significant
interest, with volume of 2,000.
Some traders are expecting a stock split to be announced
with its earnings release.
Looks like those Cendant (CD:NYSE) call buyers of
Monday were right.
That's when the upside betting began, and since the stock
has risen to 18 from 15, including today's one-point jump
on news that Chairman Walter Forbes would be stepping
down.
The August 17 1/2 calls that cost 1/2 ($50) on Monday
were trading at 1 1/2 ($150) today, up 7/16 ($43.75).
Volume on that series hit 1,398 by around 12:30 p.m.
EDT. The optimists didn't stop there, though.
Traders had paid 1/2 ($50) and pumped volume on the
August 20 calls to 3,700 as they speculated that Cendant
-- whose accounting practices have blown the stock up
twice over the past six months -- has roughly another 14%
of upside left before Aug. 21, when the options expire.
Staff Reporter Kevin Petrie contributed to this story.
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