Philip Morris Puts Roll as Holders Look for Insurance

Hold on loosely, American Stock Exchange options traders were saying, but don't let go. To options in Philip Morris (MO), that is: Salomon Smith Barney Monday traded a whopping 20,000 contracts.

Like Microsoft (MSFT) and some Internet issues, Philip Morris is a lucrative and popular option that, until a recent listings war among the nation's top options exchanges, traded in only one place.

Once the exclusive purview of the Amex, Philip Morris options now trade on all four exchanges. But war has brought prices down and sharpened competition among market makers, and jumbo institutional customers are showing more of their orders ---such as the 20,000-put Big Mo order -- to the floor.

The trade clocked in as 20,000 puts, expiring in January 2000 at a strike price of 40; Solly paid roughly 6 1/8 ($612.50 per contract). The stock was trading at 34 9/16, up 1/4.

After a five-year criminal investigation ended without any indictments, Philip Morris, R.J. Reynolds (RJR) et al. last week found out they face a civil suit from the government.

Volatility Index Today % Change 27.19 -7.96 Source: ILX

"This trade is certainly a cheap way to protect an investment" in Philip Morris, said one institutional options trader. "It's hard to tell whether that's what they're doing." A person at Solly's trading desk said the firm couldn't provide information on the trade or who the customer may have been.

Big trades are often good indicators of institutional sentiment toward a stock, though it's frustratingly hard to divine motive. Inner monologue sounds something like this: Does the market maker, who sold the puts, think they're bound to expire worthless? (By selling, he or she is essentially taking a long position.) Or does the customer who bought them really believe in the stock but want an insurance policy over the next few months?

"We'll find out tomorrow when the open interest moves whether it was someone buying and opening a new position, or selling to close," said Kyle Rosen with Rosen Capital Management. "It's more likely that it's a purchase-to-open. They own 2 million shares [corresponding to the 20,000 contracts] and it's an insurance" policy. Rosen is long Philip Morris stock and short January puts.

Put/Call Ratio Today (Noon) Previous Close 0.45 0.58 Source: ILX

Separately, Rambus (RMBS) stock -- and call options -- took it on the chin Monday following news that proved to be a nightmare for the maker of chip designs.

Rambus shares tumbled 9 3/8, or 13%, to 61 3/4. Among the most active of the options were the November 55 puts on the Chicago Board Options Exchange and others.

Randy Emer with Eclipse DPM on the Chicago floor said the pit was "totally blindsided" by the news. Goldman Sachs, however, was a buyer of the October 70 puts on Friday. Those puts shot up 4 3/4 ($475) to 10 1/4 ($1,025) on Monday.

"Volatility was high, but it was also earnings month, so they weren't unusually high," Emer said.

Eclipse was chosen as the designated primary market maker for Rambus and other equity options under the CBOE's new market-maker system. While it's a feather in the cap to be chosen as a DPM, Rambus' blowup illustrates the risks of trading volatile options. "That's the price you pay," Emer said. "Everybody knows about the risks. You just try to control it."

Linkage Arrives?

Interactive Brokers, part of the Timber Hill options-trading firm, said Monday that it will offer a new trading station technology featuring automated, best-price execution for U.S. equity options traded on more than one exchange.

Who cares? Well, if you're a retail investor, you should. "Linkage," or lack of it, has been a major problem for options customers. Unlike equity exchanges, options exchanges aren't united by any automatic electronic network showing the best prices offered by the top four exchanges.

Interactive Brokers has enlisted Wall St. Access to try out the software, which the firm is marketing as "aggregator" of all the bids and offers from the four exchanges -- in essence, a sort of substitute "linkage" system for which securities regulators have been pounding the table.

Question is, does Interactive Brokers want to compete with the International Securities Exchange? The ISE is filing to become a new exchange and preparing to launch options trading in March 2000.

"It's going to be a question of cost," said Michael Schwartz, options dean with CIBC Oppenheimer in New York.

A spokesman for Interactive Brokers said the firm isn't directly competing with the ISE. "We simplify the process of routing the order to best price. We charge a premium for that," he said. ISE will be "just another platform" for which Interactive Brokers' trading station culls prices and routes orders. "Plus, they're not in business yet," the spokesman said.

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