From options buzz re ASND options today:
There's nothing like takeover rumors to get options smoking on a Monday morning. But those swirling around Ascend (ASND:Nasdaq) were being played with a strategy that's being seen more frequently: selling long-term calls.
There was the typical action in Ascend's out-of-the-money November 55 calls today as sellers took in 11/16 ($68.75) against the possibility the company would be acquired by Nov. 19. Volume on that contract hit 1,400 as the stock stayed flat at 49 1/2.
Last week, though, a bigger trend was developing for those who believe that Ascend is ripe to be picked off by Lucent (LU:NYSE), Northern Telecom (NT:NYSE) or any of the other prospective suitors. Jon Najarian, whose Mercury Trading is an Ascend market maker at the Chicago Board Options Exchange, said longer-term options were showing increased activity on Thursday and Friday.
"Last week was the first week in a long time when people were selling LEAPS on Ascend. It was a real breakthrough," Najarian said. "It could be a sign that people may believe there's going to be some kind of deal." Open interest on January 2000 calls at the 60 strike price has grown to more than 3,000.
Why sell calls if you think a company is going to get taken over? Well, typically, you would buy calls to speculate on a takeover, expecting the stock price to rise and drag your option along with it. Recent takeovers, however, haven't packed a whole lot of premium and call prices have been near historic highs, rendering that strategy less effective.
If traders instead sell longer-term calls, they take in premium. If a deal happens, though, the longer-term options actually lose their value. The reason: Most of their value comes from the time premium inherent to all options. Najarian pointed to the Ascend's January 2000 60 calls, which were trading for about 9. "About $5 of that is in time, $4 is in volatility, so if a deal happens at $60, those options are worth zip," he said, explaining that a merged entity's options are created and the others -- especially the long-term ones -- essentially don't trade and have little value. |
