Ciena Options Soar as Stock Price Sags

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With Ciena's (CIEN) - Get Report stock getting whacked again Wednesday, the prices for options on the stock have exploded.

Ciena, an optical networking equipment maker, has seen its stock plummet since it was trading at all-time highs in October. On Oct. 20, it traded as high as $151 a share. On Wednesday, the stock was down $16.50, or 20%, to $67.50. Considering how big the swings in the stock are, it's no surprise that the prices for the options would be extremely high.

Implied volatility, a key component of an option's price, is terribly high in Ciena options. Implied volatility is an estimate by the market of how much the underlying security can move. Alan Goldstein of

Five Dollar Trading

pegged the volatility level as high as 150 late Wednesday morning. Implied volatility doesn't indicate which direction people potentially think the underlying stock will move, only the severity of a potential move.

Goldstein said that the implied volatility reading on Ciena was at levels not seen in a long time, "if ever," which means investors who want to buy options, either puts or calls, will pay up for that opportunity. Aside from a sizable spread trade involving the December 85 puts and the December 95 puts, volume in Ciena options was about even between puts and calls.

A put option gives the purchaser the right, but not the obligation, to sell a security for a certain price by a specific time. Generally, investors buy put options either to speculate on further downside for the underlying security or as protection against a long position in the stock. A call option gives the buyer the right, but not the obligation, to buy a security for a certain price by a specific time. Generally, investors buy call options to speculate on a stock's rise.

On the

Chicago Board Options Exchange

, the Ciena December 70 puts were up 5 5/8 ($562.50) to 9 1/4 ($925). The out-of-the-money Ciena December 65 puts were up 4 3/8 ($437.50) to 6 3/4 ($675).

The

Securities and Exchange Commission

on Tuesday adopted a formula for allocating

Options Price Reporting Authority

system capacity during peak usage periods. The formula, however, will only be applied in the short term until the options exchanges resolve the OPRA capacity concerns, the SEC said.

The standard procedure is that all quotes from the options exchanges are sent to OPRA. OPRA then transmits that data to quote vendors. Unfortunately for investors and traders, the huge volume of quotes and the volatility in the market have boosted the number of messages to OPRA and created a bottleneck there. The SEC noted that over the past year, the quotes generated by the options exchanges have sometimes exceeded the limits of OPRA's systems capacity. When that capacity is exceeded, option price quotes become stale, making it difficult for traders and investors to know exactly where prices should be for options.

The SEC said the intention of the move is to push "the efficient use of this scarce resource" until the options exchanges resolve the capacity problem.