Options Traders Follow the Calls to Global Crossing

Erin Arvedlund

Global Crossing (GBLX) may have been beaten down during a grueling but ultimately successful mating dance with Frontier (FRO), but traders are finally feeling optimistic about the company's prospects.

That sentiment was apparent this morning from action in the options market, where traders were swapping calls like hotcakes into the news that the company had entered into a venture with Microsoft (MSFT) and Softbank.

Volatility Index Today % Change 24.18 +3.64 Source: ILX

Investors are understandably wary when it comes to Global Crossing. The company's merger with Frontier was confusing, and the news of Global's linkup to build an Asian telecommunications network might be greeted with even more skepticism as just another announcement waving around Microsoft's name to win back investors' hearts.

But in this case, "maybe it looks like a one-day pop, but the stock's gotten down to very attractive levels," said one institutional options trader.

"When Global announced the merger with Frontier, the stock went from around 60 down to 20. The stock's been really beaten up, and now this Microsoft news has turned out to be a major positive," the trader added.

Put/Call Ratio Today (Noon) Previous Close 0.44 0.45 Source: ILX

Global Crossing stock was up 4 7/16 to 24 3/4, and the at-the-money September 25 calls were among the most active, up 5/8 ($62.50) to 7/8 ($87.50). September 25 puts, meanwhile, slid 7/8 ($87.50) to 2 1/2 ($250), showing little desire to play a short-term selloff after today's news.

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Options traders are taking to heart one analyst's warning about Pillowtex (PTX), which makes bed pillows, blankets, mattress pads and other bed and bath items.

The company received a downgrade from Standard & Poor's earlier in the week, sparking even more concern after the company said it expects continued earnings weakness for the remainder of 1999.

As a result, traders spent the morning bidding down Pillowtex calls. With the stock down 1/16 to 8 11/16, the longer-dated 2000 February 10 calls options slipped 1/2 ($50) to 1 3/8 ($137.50), and the 12 1/2 calls fell 5/8 ($62.50) to 1 ($100) on thin volume.

After the collapse of heavily leveraged Iridium (IRIQE), debt analysts are looking more closely at companies with shaky balance sheets, and Pillowtex carries about $1.1 billion in total rated debt.

"Defaults are increasing, and the spread in distressed debt is widening," said Marilyn Cohen, manager of the Envision Capital Management high-yield debt fund in Los Angeles. "Things aren't as solid financially everywhere like they are in high-tech and telecommunications."

"Further, liquidity is extremely tight and the company is seeking waivers and amendments to its bank covenants for the remainder of 1999 and beyond," according to Standard & Poor's downgrade report.

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Meanwhile, there's not been even a whiff of news on Dial (DL), but call-buying continues in options of the consumer products giant.

The fact that Dial's shares were off 13/16 to 28 13/16 Wednesday didn't stop option traders from fattening the October 25 in-the-money calls 7/8 ($87.50) to 4 3/8 ($437.50).

And as Maytag (MYG) stock dipped 2 9/16 to 61 7/16 Wednesday, its fall jacked up the price of its September 65 puts, up 1 1/8 ($112.50) to 3 1/2 ($350), luring in a buyer of the 2000 January 55 puts to the tune of 1,500 contracts.

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The Options Industry Council released figures Wednesday showing that speculative fever among U.S. investors is at about 105 degrees, and record options volume is coming in its wake.

The OIC said equity options trading volume in August rose 25% from the same period last year, with 34.1 million contracts changing hands.

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