Bulls Snort Around AT&T Options, Looking for Turnaround Plays

With the stock market moving in mysterious ways this morning, the options market was taking its cues from company specific news.

Amid a quiet session, Paul Foster, options strategist and editor at 1010 WallStreet.com, says the main theme is that volatility continues to be low with "at-the-money" calls on the OEX, or S&P 100 index, trending lower. At-the-money means the strike price of the option contract is at or near the actual trading value of the stock or index level.

Among individual stocks, Foster says there is a "huge bullish spread in AT&T (T Quote - Cramer on T - Stock Picks) as the Street continues to look for turnaround plays."

A Wall Street Journal column this morning noted buying in AT&T by a Pimco value fund manager. "Investors are playing the call action well in advance," says Foster. There was a fair amount of put activity as well today, though, as buyers hedge positions. (Call options give the holder the right, but not the obligation, to buy the underlying stock at a set price.)

In AT&T's July 25 puts, 2,320 contracts changed hands on open interest of 26,319. (A put gives a buyer the right, but not the obligation, to sell the underlying stock at a set price.) Pimco may be way ahead, but there are other brokerage houses looking at the stock, says Foster. They "can pick a position and leverage" from there, he says.

The stock and options price activity in natural gas service company Hanover Compressor (HC Quote - Cramer on HC - Stock Picks) provides a somewhat cautionary tale on option plays. Volatility started ramping up last Friday on rumors that the stock was a takeover target. Foster says average volatility on the stock was about 33 last month but that it has spiked to about 80 for July.

Yesterday, amid rumors that the takeover talk was just that and nothing more, the stock plummeted 9% and is down another 3% today. Larry McMillan, who pens the Options Strategist newsletter, says the stock got "creamed" and adds this is "unfortunately also the kind of action that one can find in a 'rumor stock.'"

Though options traders generally use any volatility to hedge movements in a stock price, McMillan says in this case many of the options plays were made with the expectation of bullish news on the company. Furthermore, the Hanover Compressor options "are more expensive than ever" right now, he says.

Indeed, most of the bets today on Hanover Compressor were in the form of puts. The price for July 35 puts was rising $2, while the price of August 35 calls was falling $3. One hundred twenty-one July 35 puts traded on open interest, or contracts outstanding, of 162.