TSC Options Buzz: Tellabs Bulls? They're All Over the Options
thestreet.com
By Dan Colarusso
and Gregg Wirth
Staff Reporters
8/14/98 2:08 PM ET
As Tellabs (TLAB:Nasdaq) and Ciena (CIEN:Nasdaq)
shareholders ran for the exits this morning, sending both
stocks into a tailspin, the options pits became increasingly
frenzied. By late in the morning, however, Tellabs market
maker John Oppenheimer saw the action slowing and it gave
him a chance to look over the aftermath.
"It's settled down now," he reported at 1 p.m. EDT today.
But the Pacific Exchange trader worked his way through a
morning that saw legions of call buyers paying high prices to
get long in Tellabs. "The vols ran up to 80 or 90 from around
47; now they're coming in some," he said, describing the
levels of implied volatility, the stock's expected trading
range. The stock's nosedive and accompanying speculation
"was all a result of The Wall Street Journal story this
morning." The Journal published an article that raised
questions about the relative value of Ciena as a partner for
Tellabs. (TSC also explored Ciena's problems in a story this
afternoon.)
Oppenheimer, a principal in market-making firm
Oppenheimer Noonan & Weiss, described a wild morning
with "brokers lining up with their orders. We just had to get
them all filled -- that's the important thing in a market like
this," he said. "There's a lot of speculating." Oppenheimer
said the P-Coast crowd had no hint that that today's tumult
was coming: "We didn't see any order flow before this
morning."
Despite the fact that Tellabs was crushed, losing 11 3/4 to
60 1/16 by 1:25 p.m., Oppenheimer said call buyers
stormed the walls. "Huge call buyers, paying ridiculous
prices," he said, "and the put sellers were just closing
positions."
One options trading firm strategist said the call-buying was
inspired by hopes that the firm's shareholders meeting next
Friday would result in a restructured or canceled Ciena deal.
"If this deal gets called off, Tellabs could go up 20 points,"
the strategist cracked.
The call buyers were giving themselves time, too. They
mostly were snapping calls along the September 65 and 70
lines, in the face of falling prices. The September 65 calls,
for instance, lost 6 1/2 ($650) and hit 3 ($300) in early
trading.
More than 2,700 September 70 calls traded before noon
while the September 65's volume reached 1,600. In one
sense, the players were getting a bargain. Those same calls
were trading 4 1/8 ($412.50) higher yesterday than they were
today, when they fell to 1 3/4 ($175).
In another sense, they were also ponying up 2 3/8 ($237.50)
for the August 60 calls, which are more than a buck out of
the money and have only a week of life remaining.
The August 60 calls traded more than 1,300 contracts while
the August 70s traded over 1,100. An interesting play is
developing in the August calls, which expire the same Friday
as the shareholders meeting. Traders could, theoretically,
exercise out-of-the-money calls and buy the shares looking
forward to a big pop on Monday if good news comes out of
the meeting. "Granted, it's an unusual play on an OTC stock
because you could pick it up on Instinet at 6:30 Friday night,
but it may be worth a shot," the strategist said.
Tellabs and Ciena shares "uncoupled" this morning, traders
noted. Yesterday, the spread between the two was under 1
and halfway through today's session, it had risen to 4 1/2.
J.P. Morgan (JPM:NYSE) is the latest beneficiary of the
market's now-common Friday free-for-all, when takeover
speculators bid up prices to cover themselves over the
weekend.
The House of Morgan rose about 8% this morning to 126
1/2, up 9 1/4, on rumors that it may be purchased by
Deutsche Bank of Germany, a jump accompanied by heavy
call option activity across the August options.
Heaviest was the August 140s, which saw 862 contracts
move against only 926 open-interest contracts. Some of that
volume looked like call-writing against a frothy market as
traders sought to take in premium against the possibility
that J.P. Morgan shares would move that much before next
Friday's expiration.
On the other hand, the in-the-money August 120s moved
789 contracts at around 8, or $800 per contract. J.P.
Morgan's call prices across the board were rising throughout
the morning as the stock surged.
Tom Young, of Philadelphia Stock Exchange specialist
firm Professional Edge, said much of the activity in J.P.
Morgan was a mix of two-sided paper and investors
establishing new positions and liquidating others. "It's pretty
equally divided," Young said, adding that both institutional
and retail investors were playing the options.
Already starting to be forgotten was the merger darling of
earlier this week, PaineWebber (PWJ:NYSE), which saw
activity in its stock and options cool slightly today after days
of speculation that it would be acquired by Germany's
Dresdner Bank.
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