Barron's, or at least Michael Santoli, the author of "The Striking Price" column, has discovered the backdoor. He apparently has not been following this thread. BKS gets a positive plug. The following is an excerpt from Mr. Santoli's April 26, 1999 column:
"Its become axiomatic that Internet stocks and the investors who chase them are operating outside the market rules as rendered by traditional analysis. But now, not much more than a year into the foaming-at-the-mouth phase of the 'Net-stock craze, some patterns are discernible. Trading opportunities of use to option players are the result.
"Leon Gross and his derivatives strategy team at Salomon Smith Barney believe they've come upon a potentially profitable abnormality in the behavior of the stock and options of companies that move to sell or spin off a piece of their Internet business, a maneuver fast gaining favor among companies that see unmined gold within certain subsidiaries.
"It seems that when a company announces plans for an initial public offering or spinoff of part of a 'Net business, investors bid up its shares aggressively and pile into the options, driving the implied volatility levels of these options way up. But once the deal is done, all attention turns to the new, pure Internet stock, the parent company's stock tends to sell off, and the implied volatility - the key component in an option's price collapses.
"Gross looked at four recent such deals, all of which followed the above script. He's now counseling clients to look toward future deals like this - buying call options on the parent when the IPO plans gear up and holding them until the deal closes, thus benefiting from both the expected rise in the share price and the fattening of the quoted option prices. Then at or near the IPO date, the calls should be sold and perhaps additional calls shorted to reap profits on the likely drop in both stock and volatility.
"The most immediate opportunity to deploy this strategy is presented by Barnes & Noble, which is slated to sell a piece of its online bookseller, probably in May. Farther down the road, traders will have the chance to play Compaq and Donaldson Lufkin & Jenrette, which are both planning similar moves with their Internet businesses. Gross says traders should wait until papers are filed with regulators for each deal before setting up the call position. |
