AOL Keeps Options Traders Busy

AOL's rally has investors playing on both sides of the options.
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America Online

(AOL)

stock gets so much press, it's practically not worth mentioning.

So let's turn to AOL options.

The hustle and bustle in AOL options today -- both puts and calls -- can serve as a sort of barometer for where the stock may be headed, even as it hits a new intraday high of 175 1/2. Investors in options are scratching their heads and wondering whether today's move is a breakout point for another rally.

If it is so, they're buying enough calls to stay involved today, especially in April 180 calls. Or will there be a pullback after this breathless runup? To protect against that possibility, some are buying puts. The busiest options were the April 165 puts, up 1/4 (or $25 per contract) to a bid of 8 ($800) on volume of 797. That compares with open interest of 1,027 contracts. AOL shareholders who bought in after the company's stock split may also be writing some calls as an exit strategy.

What gives? "What's intriguing is that call volume is not translating into open interest. It tells me there's not a lot of optimism given the move. There's no consensus that this stock is headed higher, or alternatively that when a peak is reached it may run into trouble," says Todd Salamone, trading manager at

Schaeffer's Investment Research

.

Options investors are often classic contrarians. Optimism, or heavy call buying, indicates complacency; heavy put activity equals pessimism and both extremes are seen as wrongheaded.

Salamone points out that extremely heavy call activity -- which translates into extreme optimism -- in AOL "would throw up warning flags" to sophisticated investors. "The fact that there's conflicting signals could actually be a good sign for the stock" moving higher from this breakout point.

Procter & Gamble

(PG) - Get Report

puts drew in the worrywarts today, after consumer products stablemate

Gillette

(G) - Get Report

warned that profits would get shaved because of the slow international economy.

Soft drink giant

Coca-Cola

(KO) - Get Report

said the same thing last month. Recently at a 52-week high of 101 13/16, Procter & Gamble stock slipped to as low as 98 3/8 from the open of 100 1/16.

Today, the April 90 puts in Procter & Gamble were trading in "sizable volume" compared with the open interest, and implied volatility puts were "ticking up over the last session," says Gary Semeraro with

S.G. Cowen

. "People are afraid they may forewarn on profits" like Gillette. April 95 puts were also trading in sizable volume, up 3/16 (or $18.75 per contract) to 9/16 on volume of 493, vs. open interest of 2,269 contracts.

Separately,

Gemstar

(GMST)

options saw interesting call action out of the

American Stock Exchange

. Gemstar stock was up 2 11/16 to 85 11/16.

"This could be a spread trade, since many are already deep in the money," says Paul Foster with

1010.com

in Chicago. Gemstar makes technology for interactive TV program guides, and it has already attracted the attention of such media heavyweights as

Microsoft

(MSFT) - Get Report

and

General Electric's

(GE) - Get Report

NBC

unit.

A

Los Angeles Times

article furthered speculation that Gemstar may be close to striking a licensing deal with America Online if it were looking for an entry into TV.

Out of the AMEX, Gemstar May 85 calls ticked up 1 5/8 (or $162.50 per contract) to 8 7/8 ($887.50).

"Does it have something to do with video compression? Well, the whole sector is turning into powerful currency," says Foster.

RealNetworks

(RNWK) - Get Report

shares rocketed up 20% to 186 today;

Safeguard Scientifics

(SFE) - Get Report

gained 6% to 76 3/8.

And lastly, takeover chitchat:

Dow Jones

(DJ)

popped up from Nowheresville into the rumor mill, and "it was on the floor that they were a potential buyout," says one Philadelphia-based trader. "There's never any options volume, and the fact that there was at all yesterday and today means, well, something's afoot."

The volume, on April 50 calls, was 100 contracts, compared with open interest of 115 contracts.