Ciena Takeout Rumors Resurrected

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Not long ago, investors were fleeing

Ciena

(CIEN) - Get Report

like extras in

Titanic

. Customers were defecting and merger talks with

Tellabs

(TLAB)

were in trouble, a combination that drove the stock down from 88 5/8 in mid-July to 14 today.

But today speculators are using the options markets to gamble on the revived chance that the optical network supply company will be snatched up by one of the major networking firms, with

Cisco

(CSCO) - Get Report

as the most-mentioned suitor.

While denials are plentiful, options traders were pumping volume in Ciena calls, even rolling the dice on far out-of-the-money contracts that would only benefit from a blockbuster deal that pushes the stock up to the low 20s. Ciena shares had risen to as high as 15 1/4 this morning, but were settled in up 1/2 to 14 7/16 by early afternoon.

The froth created by the rumors pushed volume on the October 15 calls to 1,600, contracts whose price climbed just 1/4 ($25) to 1 1/4 ($125). Savvy traders took advantage of the activity to sell the October 20 calls for about 5/8 ($62.50), movement that resulted in volume of more than 3,000 contracts at that lofty level. Some of this was accounted for by some covered call writing.

Floor traders in Chicago said Ciena action was "two-way paper," meaning both buyer and sellers of options were in the market, especially with the overall implied volatility of most options still higher than normal. The takeover rumors could be carried on the shoulders of Ciena shareholders who bought in during the Tellabs negotiations, hoping for the company's shares to move high enough to sell out without too much damage.

A big print that came down in

Halliburton

(HAL) - Get Report

puts wasn't a bearish bet on some type of crash in the oil services market.

With the company's shares up 9/16 to 29 3/16, a put seller hit the

Chicago Board Options Exchange

crowd with a 1,000-contract order at 1/2 ($50). Traders reported that the player was merely a premium seller taking advantage of juicy options prices to take in some premium. "The guy went $5 out of the money and got half a buck for it," said one options pro, complimenting the trade.

The overall volatility in the market hasn't been totally crushed, and the

VIX

is still in the mid-30s, down a scant 1% today.

Swiss American Securities

options strategist Scott Fullman said he's been recommending selling premium and writing covered combinations for investors to take advantage of the high volatilities. "The market is so jittery, you almost have to be defensive," Fullman said. "One of the reasons premiums are so high is to compensate for the increased risk." Fullman, however, said that there are several good stocks that have been beaten down and had the risk normally associated with selling puts somewhat lessened. The major risk in selling puts is that the options get assigned and the writer buys depressed stock before it hits a bottom.