Dell Call Options Fall Into Bargain Basement

Investors who are bullish on Dell (DELL Quote), even after the company's nauseating earnings warning, may be playing some cheap call options out there for the bidding.

"Dell has one of the most overowned stocks, along with Micron Technology (MU Quote)" and some other popular technology favorites, said R.F. Lafferty's Jay Shartsis, who, by his own admission, has been a longtime bear on the overall market.

Volatility Index Today % Change 26.57 -9.75 Source: ILX

Dell cautioned Monday that a 25% increase in computer memory-chip-component prices used in its PCs would probably dent its third-quarter profit margins.

But even Shartsis chimed in that "Dell stock right now is priced to perfection," as the share price has skidded 3 to 38 5/16. "Let's face it: It's still trading at 64 times earnings. But I don't think I'd be short it at these levels."

Put/Call Ratio Today (Noon) Previous Close 0.31 0.48 Source: ILX

If investors had opted to short Dell via the November puts, they have witnessed an explosion in price. Dell's November 37 1/2 and 40 puts are among the most actively traded, and that heavy volume led to increases of 1/2 ($50) to 2 3/16 ($218.75) and 1 5/16 ($131.25) to 3 3/8 ($337.50), respectively.

The value of the November 37 1/2 calls, meanwhile, has been nearly halved during this week's early bloodletting, shedding 2 3/16 ($218.75) to 2 15/16 ($293.75). Volume in that contract was more than 5,000, and the November 40 calls were even more active, with more than 7,000 contracts trading, but as prices fell, much of that action could have been the fearful heading for the sidelines.

As a result, for those who can't live without being long Dell, the 37 1/2 calls are a blue-light special.

The Internet options, meanwhile, stormed back despite the weakness in chips and PC boxmakers. Yahoo! (YHOO Quote) and eBay (EBAY Quote) topped the most-actives list and were among the gainers in the tech sector along with the semiconductor stocks.

Yahoo! shares were up 5 to 175 3/8, and eBay was up 4 1/8 to 133 5/8. A mammoth trade in longer-dated Yahoo! options topped the most-actives, two trades of roughly 7,500 contracts each in the January 250 calls. The orders were divided between the Chicago Board Options Exchange and the American Stock Exchange at prices of 4 3/8 ($437.50) and 4 5/8 ($462.50).

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Lastly, some call activity surfaced in Price Communications (PR Quote), a wireless operator in the southeastern U.S.

Takeover fever struck the sector Tuesday again, after British mobile-telephone company Orange PLC (ORNGY Quote) confirmed it had been in talks with German engineering and telecom group Mannesmann.

In sympathy, Price Communications stock gained 3/4 to 25 5/16, and some options traders picked long-dated 2000 February 30 calls, which gained 7/16 ($43.75) to 2 1/8 ($212.50), to play for some upside.

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Investors can't seem to get enough of options. Last Friday's October 15 options expiration set a total volume record of 3,906,307 contracts, beating the previous high of 3,150,853 contracts traded on July 16 by 24%. Equity options volume also saw a record day with 3,413,080 contracts traded.

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The Securities and Exchange Commission issued an order Tuesday directing the four oldest U.S. options exchanges and the new International Securities Exchange to submit a plan within 90 days to electronically link their markets.

Tuesday, the SEC is hosting a meeting of the options exchanges in Washington to discuss the issue of "linkage" for multiply listed options. Regulators have been pressuring the exchanges for years to work out how customers can receive the best-price execution by being able to see where the cheapest quotes are on every exchange.

The exchanges have 90 days from Oct. 19 to submit a plan to the SEC, which said any plan must contain rules on "uniform trade-throughs" preventing a trade from being executed on one options market at a price inferior to another.

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Also, join us for an hourlong chat on options today, Oct. 19, at 5 p.m. EDT, when trader Lewis Borsellino will discuss daytrading options on Yahoo! Register at: chat.yahoo.com. It's free!