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Strategies & Market Trends : Tech Stock Options -- Ignore unavailable to you. Want to Upgrade?

To: Darth Trader who wrote (43285)	5/15/1998 2:03:00 AM
From: SteveG	Respond to of 58727

<A> Options Report: Hewlett-Packard Trade May Reap Nice Return By Steven M. Sears NEW YORK (Dow Jones)--Hewlett-Packard Co.'s profit warning caused a chaotic sell-off when the stock market opened, but one firm waited until the stock settled and waltzed into the options market to execute a short-term trade that could earn a very high-return. The firm, probably a hedge fund, sold 7,500 in-the-money May 70 calls and used the money it received to lower the cost of buying Hewlett-Packard stock. The other side of the option trade was taken by the firm's broker, a major securities firm. Without knowing the stock purchase price, it is difficult to determine the profit potential with any precision, but calculations at various price levels indicate the firm's two-day return could represent a 190% to 250% annualized return. This doesn't mean the firm reaps a triple-digit return, but it does mean that the firm locks in a daily return that will lead to a triple-digit return if the performance is repeated every day of the year. "They're selling in-the-money calls with the intent of earning a higher rate of return," a New York-based options trader said. The firm's broker, a major New York securities firm, is trying to sell the contracts before they expire Friday, a trader said from the Hewlett-Packard trading pit at the Chicago Board Options Exchange. The arrangement may seem strange, but it happens all the time on Wall Street. Brokerage houses want their institutional customers to be happy, so firms take the opposite side of trades if that means they can continue to earn commissions off their best customers. The firm's ultimate goal is to provide clients with one-stop shopping. Of course, taking the opposite side of trades sometimes means getting the proverbial short end of the stick. But in these situations, the brokerage firm's institutional traders spend the day trying to get out of the position. That's just what's happening with the Hewlett-Packard trade. "They bought it from their customer to facilitate the trade. Now they're trying to get out of the calls," the trader said. For the firm's client, selling calls and buying stock is a strategy that professional traders commonly use to lower the cost of buying stock. The strategy is called "buy-writing." After Microsoft's May 90 call, Hewlett-Packard's May 70 call is the most actively traded call at any of the four option exchanges. The contract is down 9 3/4 at 1 3/4 on volume of 20,056 contracts, compared with open interest of 14,231 contracts. The underlying stock is down 11 5/8 at 70 on volume of 18.8 million shares, compared with average daily volume of 3.3 million shares. Elsewhere in the options market: - A volatility play was set into motion earlier in the session on Worldcom Inc. A firm used a long "strangle" to play what it apparently thinks will be a meaningful move that will push the stock out of its tight trading range, said Joe Sunderman, a senior analyst at Schaeffer's Investment Research, formerly known as Investment Research Institute. Worldcom's volatility is at one of the lowest levels in the past year, Sunderman said. Sunderman said the "strangle" was used because the firm doesn't know if the stock will move higher or lower. The trade consists of a long December 50 call and a long June 42 1/2 put. Worldcom's stock has traded tightly around its current price of 43 5/16 since late March.