Options Buzz: Microsoft Courts Bulls on Hopes of Legal Ruling

On an otherwise lackluster trading day, investors appear to be rekindling their love affair with seasoned heavyweights Microsoft(MSFT) and Lucent(LU), with options flowing freely on both.

Volatility Index
Today	% Change
23.59	+2.83
Source: ILX

Investors were buying deep out-of-the-money calls on Microsoft today. The most active were January 120 calls, which traded 8,600 contracts on the Chicago Board Options Exchange alone. The stock was trading recently off 66 cents, at $71.06. The premium on those calls was a meager 50 cents ($50 per 100), offering a fairly cheap way to speculate on a dramatic upward movement in the stock over the course of the next six months.

Nasdaq Volatility Index
Today	% Change
52.99	-0.43
Source: ILX

The action followed a note this morning from Merrill Lynch analyst Henry Blodget raising the idea that the appeals court could rule soon in the antitrust case against the company. "We expect to hear the appeals court ruling anytime (probably a Tuesday or Friday)," Blodget wrote. "Most legal experts project a mixed outcome: a rejection of the breakup of the company but an affirmation of Microsoft's monopoly behavior (with a call for a new remedy)."

But Blodget also said investors may be too optimistic, saying that "sentiment has swung too far to the positive: the market now seems to expect that Microsoft will just be scolded and asked to play nicer next time."

Some of the expectation about a decision stems from the basic idea that it's about time for the court to rule. Arguments were heard by the U.S. Court of Appeals for the District of Columbia in late February.

"Cases that were argued at the same time as Microsoft are now being decided," said Ernest Gellhorn, a law professor at George Mason University in Arlington, Va. "On that score, the Microsoft case had one heck of a long record, two days of arguments, people will be taking sides. [But] to get all those opinions written up will take some time."

Separately, Lucent was seeing plenty of action. While the stock has been knocked around more than Gerry Cooney in a title bout over the past year, some investors are feeling good about the stock today as merger negotiations with French telecommunications firm Alcatel(ALA) reportedly continue.

The July 17 1/2 calls traded about 11,000 contracts on an open interest of 6,210. The premium on those calls was listed at $2.10 ($210). According to one trader, this is an aggressively bullish bet that the merger will go through, or at least that the shares will jump if Lucent sells part of its business to Alcatel. But Lucent is trading at about $9.22, and few observers expect Alcatel to offer a premium on Lucent's stock.

Meanwhile, volatility inched upward heading into the long weekend, with the CBOE Volatility Index climbing to 23.85. However, volatility has come down 34% in the last two months. According to Ross Kaminsky, of Tahoe Trading, "The severe decline in volatilities in the past few weeks has hurt a lot of traders."

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