Put-Option Buyers Play Tech Names for More Bad News; Harris Calls Pop Again

Options volume on some major technology stocks has exploded lately as traders speculate that some companies that haven't issued earnings warnings yet will do so soon.

Volatility Index
Today	% Change
33.28	+0.18
Source: ILX

Volume in options on Cisco (CSCO Quote - Cramer on CSCO - Stock Picks), Sun Microsystems (SUNW Quote - Cramer on SUNW - Stock Picks) and Juniper Networks (JNPR Quote - Cramer on JNPR - Stock Picks) soared yesterday amid the market's broad selloff.

Nasdaq Volatility Index
Today	% Change
71.84	+5.08
Source: ILX

Demand to buy options on Sun Microsystems has led to a spike in the implied volatility levels of the options. Sun and Cisco are two companies that have yet to issue specific earnings warnings for the upcoming quarter, which has led to speculation that they will, considering the earnings warning epidemic has shown little sign of abating.

Dan Brady of Letco, the lead market maker in Sun options on the Pacific Exchange, said implied volatility on Sun has risen about 20 points to 100 from 80, showing that investors have an increasing sense of uncertainty about the stock and are expecting some kind of news from the company. Implied volatility is a key component of an option's price and the market's estimate of how much the underlying security can move.

Sun shares were getting beaten up today, off 96 cents, or 6.1%, to $14.89. The stock hit a 52-week intraday low earlier, cratering at $14.75.

Put buyers were big in Sun's April 17 1/2 puts yesterday. A customer bought nearly 15,000 of the April 17 1/2 puts yesterday. The puts were seeing a bit of action today, but not like yesterday. The April 17 1/2 puts rose 0.85 ($85) to 3.30 ($330) on the P-Coast.

Brady said there were bidders to buy out-of-the-money call options on Sun, however. The April 20 calls were trading a fair amount, with about 1,800 of the calls trading on the P-Coast. The calls fell 0.10 ($10) to 0.25 ($25), as it appears some traders were taking a cheap shot, hoping to make a little hay if Sun shines before expiration. April equity options expire on April 20.

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The call buyers were back in Harris (HRS Quote - Cramer on HRS - Stock Picks) yesterday.

What is interesting about the bullish action in Harris options is that the company's stock recently has traded in a narrow range of about $25 to $23. During the past few sessions, the stock has sold off markedly. Yet, the call buyers keep coming.

Late this morning, Harris was up 35 cents to $23.50. Traders buy call options to express a bullish outlook on the underlying security.

Dave Huskin of Calusa, the designated primary market maker for Harris options at the Chicago Board Options Exchange, said there were some buyers of the April 22 1/2 and April 25 calls yesterday.

The April 22 1/2 calls traded 107 contracts yesterday, while the April 25 calls traded 650 contracts. Judging by open interest as of last night's close, traders were mostly initiating new positions. As of Wednesday's close, open interest in the April 22 1/2 calls rose to 900 from 800 on Tuesday, while open interest in the April 25 calls rose to 883 from 435.

The action in Harris options recently was mentioned by some options market analysts as suspicious.

The action yesterday, with the renewed call buying and the high price of Harris options has also raised some eyebrows among the analysts who noted it in the past. Options guru Larry McMillan of McMillan Analysis had Harris options on his list of options with high implied volatilities. And the Seidman-Skupp duo at Miller Tabak put Harris under its "call-buying continues" heading in a report to clients today.