Compaq Options Buyers Keep the Faith - TheStreet

Options play in

Compaq

(CPQ)

was just average Friday, especially compared with the final hours of trading Thursday when players rushed in to buy the boxmaker's call options even as the stock got hammered.

Compaq's stock took a hit during Thursday's session after

Salomon Smith Barney

analyst Richard Gardner cut his near-term price target and rating on Compaq, citing concerns about second-quarter inventories. The analyst said he believed that the computer company's channel inventories are the highest among PC vendors and he said that the buildup might have a negative near-term impact on PC margins. He downgraded Compaq to neutral from buy and sliced its near-term price target to 25 from 45.

The stock traded as low as 23 7/16 Thursday before ending the session at 25 11/16 but the call-buying Thursday and some residual action today show that more speculative investors haven't quite been scared out of their affection for Compaq.

One

Pacific Exchange

trader said that on Thursday when the stock initially got down to the 25 range, call buyers on Compaq swooped into the market.

Implied volatility, meanwhile, has dropped Friday from Thursday's levels in front month (July expiration) options contracts, showing that options traders think the chance of a drastic move in Compaq shares is less likely. Shares of Compaq on Friday have traded as high as 25 13/16 and as low as 25 1/16.

On Thursday, the heaviest volume was seen in the July 25 calls, with 8380 contracts trading. The July 27 1/2 calls were popular also, with 7454 calls trading.

The Pacific Coast source said there wasn't a rush to trade Friday, as the Compaq shares fell 3/8 to 25 5/16.

The most popular contract was the July 27 1/2 calls, which traded more than 6400 contracts on the

Chicago Board Options Exchange

. The calls were unchanged at 7/16 (43.75).

After the close Thursday, Compaq CFO Jesse Greene responded to the Salomon action by saying that his company was "comfortable with channel inventory levels" and that "channel inventory has been low and in some cases near stock-out levels."

On the heels of the Salomon report, a gaggle of Wall Street analysts were out raising the banner in support of Compaq.

SG Cowen

said it spoke with the company's management and "they affirm their view that channel inventories are in lean shape" and SG Cowen said it was comfortable that Compaq will meet its 20 cents a share earnings estimate. SG Cowen rates Compaq a buy.

Merrill Lynch's

Steve Fortuna was out with a note defending Compaq, stating that he spoke with the company regarding "a competitor's downgrade. We believe there will be no material change to guidance." Fortuna has an intermediate-term and long-term accumulate rating on Compaq.