Bulls Bail Out of Talk.com Calls Despite Company's Solid Earnings

Also, Source Media's put activity is reportedly linked to an electronic error.
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Many Internet-related companies have to grapple with the market's verdict on the "E" part of their P/E ratios. Several have yet to turn a profit, making the earnings part a bit difficult to navigate.

But here's a case where the company appears to be reporting actual earnings. And yet the market's verdict has been harsh.

On Tuesday, call buying was heavy in

Talk.com

(TALK)

, which just changed its name from Tel-Save.com. (It previously was just plain Tel-Save.) The company calls itself an e-commerce telecommunications provider through

America Online

(AOL)

. The stock ticked up this morning in anticipation of a Tuesday morning earnings announcement. Call buying signals bullish sentiment on the part of investors.

But by midsession, after a conference call with company executives, the stock dropped roughly 10% to a trading low of 12 3/4 on heavy volume of over 4 million shares. Options investors apparently don't think the stock will hit 15 by expiration next month; they bailed out of the May 15 calls, the price of which dropped 9/16 ($56.25 per contract) to 3/16 on volume of 5,267 contracts. That compares with open interest of 1,922.

Must have been an illuminating conference call. Especially after Talk.com reported operating income of 20 per share in the first quarter, above the

First Call

consensus of 16 cents and much better than the year-earlier's loss of 65 cents.

Elsewhere in the technology sector,

Source Media

(SRCM)

July 25 puts looked like they attracted a lot of activity, but according to a floor broker in the options, there was a mistake in the computer-generated transactions. "A 50-lot order came over electronically, and for some reason the system quadrupled the order, repeating it a few times," says the broker. "Talk about needing a systems upgrade."

Source Media, a Dallas, Texas, provider of interactive TV, fell 7/16 to 23.

Staples'

(SPLS)

slightly in-the-money calls popped up on the radar screen, with heavy volume in the June 30s. The stock popped up over 30 today, up 3/8 to 30 9/16, but that didn't stop investors from bidding up the June 30 calls 3/16 ($18.75 per contract) to 2 15/16 on volume of 2,028 contracts, compared with open interest of 444.

Sprint

(FON)

said last week that it entered a multiyear marketing agreement with Staples to sell communication services at more than 745 Staples superstores in the U.S. Sprint said it will target home-office and small-business owners. The agreement also will allow Staples customers to purchase Sprint communications services through Staples catalogs, direct mail and other sales channels.

Does that explain why investors are paying up for Staples' in-the-money June calls? Possibly, if they think Staples could mimic the success of

Tandy

(TAN) - Get Report

, which has boasted success from a similar personal communications systems focus within its

Radio Shack

stores and "store-within-a-store" concept. Tandy has formed a series of strategic alliances with Sprint and its

Sprint PCS

(PCS)

division to sell telecommunications products at Radio Shacks, and with

Compaq

(CPQ)

to sell Compaq-brand computers and equipment.