*Cendant Special* A Scramble for New Strike Prices as Investors Race for Exits

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When a stock just falls out of bed like

Cendant

(CD)

, it has to hit the floor eventually.

That's what some options traders are betting when it comes to Cendant, at least in part. But the mood, overall, was very grim as the stock tumbled terribly. Some explained the strange emergence of bottom fishing this way: Since hedge funds owned a lot of Cendant shares, some may be dumping the common and buying calls as a way to position for any upside surprise in Cendant.

No question Cendant is sowing plenty of pain on Wall Street right now. The marketing and franchising conglomerate, formed by the merger of

HFS

and

CUC International

, opened down 17 to just over 18 -- a drop of 47%.

In the options pits, the usually busy Cendant market makers scrambled to add new strike prices at levels so low as to be unfathomable just days ago. In the wake of the company disclosing accounting irregularities in its CUC unit after the close Wednesday, investors beat a path to the exit. Options traders initially dumped positions and bottom-fishing call buyers showed up as the morning wore on. The shares were down 16 1/8 to 19 1/2 at midday.

The reason for light action early, according to one

Philadelphia Stock Exchange

options trader, was "that there aren't strike prices for how low the stock has gone today." Specialists and market markets trading Cendant options on the Philly, the

American Stock Exchange

and

Chicago Board Options Exchange

were quick to add strikes, however, all the way down to the 15 level. The lowest strike price before today had been 35.

Action wasn't too heavy early. Just 1,300 contracts overall changed hands on the American, and traders said escape was the order of the day. "Most of what we're seeing is liquidation at the higher strike prices," said Dave Cohen, of

Tague Securities

, which trades Cendant on the Philadelphia. "We didn't get a sense that this was coming, it was really from out of left field." By 11:30, though, things had picked up at the new strikes, added in May but not April, with expiration coming tomorrow.

The May 20 calls traded more than 2,500 across the three exchanges and the May 25 calls posted combined volume of more than 1,000 just before noon. "It's a different stock now," said one option firm strategist. "A lot of things can go on between now and May expiration, so people are basically playing the hope that the stock can recover to 22."

Cohen said that the open interest on Cendant was deep enough to create a big mess for traders, but that today's dip could cause some longer-term problems for the stock. "For investors, this thing may become radioactive," he said. "And it'll have a half-life of around two years."

In

American Bankers Insurance

(ABI)

, the object of a intense bidding war Cendant won over

American International Group

(AIG) - Get Report

, saw some heavy trading in its calls. With the Cendant bid at 67 and involving a significant component of now-embattled stock, the speculation can begin anew. "AIG is still out there," the trading firm strategist said. "And there's a feeling that Cendant may have to renegotiate."

With its shares trading down 5 15/16 to 58 15/16 today, the busiest ABI options were the May and July calls at the 60 and 65 strikes. The July 60s traded 2,500 contracts and the 65s traded almost 5,000 by midday.