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Technology Stocks : ASML Holding NV -- Ignore unavailable to you. Want to Upgrade?

To: dr_elis who wrote (1297)	11/14/2006 12:15:43 PM
From: niek	Read Replies (1) \| Respond to of 43514

Options on Takeovers 11/14/2006 A pair of articles this weekend, one in The New York Times and the other in Barron's, covered the topic of using options to speculate on takeovers. Both pieces conclude that while technology has made it easier to track and trade on unusual options activity, it also makes the challenge of separating the wheat from the chaff more difficult. For example, recent bids for OSI Restaurant Partners and Swift Transportation reaped huge profits, but recent unusual activity in ASML and Maxim have yet to bear any fruit. Electronic trading allows parties that might be privy to or have a hunch about a possible takeover to execute a fairly large option order quickly and, more importantly, anonymously. In the past, when orders needed to be worked in person on the trading floor, not only did it take longer to execute the transaction, but it also was transparent as to who was doing what. For example, was the trade truly an outright new purchase of out-of-the-money calls as opposed to a spread or liquidation? This made unusual volume a more valuable and reliable tool for identifying takeover candidates or stocks in play, but the information was confined to a small group of people. Now with intraday activity disseminated in real time, it's much easier for almost anyone to use basic software or simple tools to screen for unusual volume. The problem is that as people start piggybacking on the transaction, the volume swells further and draws even more people into what might not be a predictive or valuable trade. In less liquid issues, a simple newsletter recommendation that has nothing to do with a takeover can suddenly spark a buying frenzy, and the stock is in play. Nowadays, a list of names with "unusual activity" can run to 20 or 30 a day; clearly, the majority of these will not be takeovers or even profitable trades. Still, given the huge returns that are possible, it only takes one good winner to pay for the multitude of losers that never pan out. So many people still think it's worth it to chase down unusual option activity, however slim the evidence.