WSJ Options Report
Options Report: Stratus Takeover
Talk Has Traders Listening
By Steven M. Sears
NEW YORK (Dow Jones)--Professional options traders are
starting to believe that Stratus Computer Inc., a computer-systems
maker, will be acquired by Ascend Communications Inc., a
data-networking company.
Their loss of skepticism came Friday as the "smart-money" set
began trading hundreds, or a thousand, call contracts at a time,
compared to the 10-lot and 20-lot traders who dominated Stratus
trading earlier in the week. Institutional traders who take big
positions often have the best information of anyone in the market.
The activity in Stratus was the exception to a slow trading day in
the options market. Many money managers and traders are done
hedging their portfolios so even the stock market's decline failed
to start a buying spree of defensive options.
Stratus' strength was even more impressive because of the stock
and option markets weaknesses. Some single trades in Stratus'
options exceeded average volume of 316 contracts a session.
The stock gained 1 5/16 to 29 5/16. Ascend's stock fell 7 3/8 to
44 1/8 for reasons traders attributed to concerns that a Stratus
deal would be dilutive to earnings.
Ascend's puts also are fairly active as some investors form
defensive positions to support their sagging stock holdings.
"There's tons of activity that suggests the deals's dilutive," an
Ascend options trader said.
The most active and most speculative contract, the August 35 call,
fell 1/4 to 15/16 on volume of 2,891 contracts, compared with
open interest of 458 contracts. The decline in the contract's price
shows that not everyone believes a merger will happen next week.
Another institutional trader sold 1,000 September 30 calls and
bought 500 August 25 calls. This is an example of a 2-for-1 bull
spread which is a limited risk and limited profit trade that
suggests the trader is skeptical of the rumor, but doesn't want to
miss out in case it's true.
Few, if any trades, are clear-cut, and Stratus isn't an exception.
From a trading perspective, the deal is somewhat suspect
because the rumor revived on a Friday after fading away in the
previous session. Friday rumors are infamous in the options
markets: Many traders have bought takeover rumors on Friday
only to lose money on Monday when the deal that was supposed
to be done over the weekend never happens.
Some traders played Stratus' downside as they bought put
contracts that would increase in value if the rumor is false and
Stratus' stock price falls below 25.
Both companies have declined to comment.
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