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Computer Merger Roils Options Market

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(IBM) - Get International Business Machines Corporation Report

was bumped from the top spot of the most actively traded options, at least for today, as merger target

Computer Sciences


saw massive activity in its February and March calls.

In an otherwise tepid options trading session this morning, Computer Sciences' options were jumping. Call buying in the March 110s made that series the most actively traded option on the

Chicago Board of Options Exchange

today, after

Computer Associates

(CA) - Get CA, Inc. Report

proposed a $108-per-share, all-cash offer for Computer Sciences, worth about $9 billion.

Computer Sciences stock shot up to 104 1/4 today, up 13 1/16, and many market sources are speculating the takeout price will be bumped at least into the 110 to 115 range. The company's March 110 calls sold almost 5,000 contracts by noon today, at 3 1/4 (or about $325 per contract), meaning that the call buyers are expecting Computer Sciences' final price tag to be at least 113 1/4 in order to break even.

The company's February 110 calls were the third-most-active option today (after always-lively IBM), selling more than 3,000 contracts. There was also some activity in the March 100s, with 2,500 contracts selling at 8 3/4.

On the floor of the CBOE, trading was subdued in almost all other areas except the Computer Associates pit, where traders, often times four deep, were loudly yelling, cursing and screaming as they tried to buy all the puts they could and, at the same time, get out of all the call positions they held.

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After a mid-morning news announcement said the massive deal would likely be dilutive to CA's earnings, the trading became even more intense. Indeed, the din turned other traders into speculators, as the noise caught traders' attention around the floor.

"It an arbitrage delight today," said Michael Schwartz, chief options strategist at

CIBC Oppenheimer

. Risk arbs were likely buying options and shorting CA's stock, a common strategy after a merger deal is announced, Schwartz explained.

Traders were trying to buy CA's Feb. 55 puts, which sold 800 contracts at 3 3/4, up 3 7/16 this morning. Feb. 60 puts and Feb. 50 puts were also active and rising in price.

On the call side, traders sold CA calls for Feb. 55s and March 60s to the market maker at fire-sale prices. More than 1,600 contracts for Feb. 55s were sold at $62.50 each, after dropping from $350 yesterday. March 60s sold 1,000 contracts at $6.25 each, down from $50 before the merger news.

* * * * *

Aside from the dueling options in these two computer companies, trading in the options market was more subdued this morning, as bulls slowed to a walk after yesterday's record-shattering rally. "It's so quiet," said Dennis Bein, of

TSA Analytics

. "It's a great day to catch up on things."

Another developing story began as early birds started rolling over February options for later months, most often with a higher strike price.


(ORCL) - Get Oracle Corporation Report

saw a lot of action on its March 22 1/2 and Feb. 20 puts, with an almost identical 6,000 contracts being moved. Since both sets of puts were in-the-money with Oracle trading at 26 15/16, Schwartz suggested this meant a large holder rolled over a hedge position.


SLM Holding

(SLM) - Get SLM Corp Report

, the public entity of Sallie Mae, saw another large rollover of its in-the-money Feb. 45 calls into its April 50 calls, with more than 4,000 contracts changing hands. SLM was trading at 45 3/8.

Two interesting speculation plays also traded this morning, as more than 5,000 contracts of



Feb. 115 calls traded at 5 3/8, before 10 a.m. It may have been a prescient move: Telebras surged today to 121 1/8, up 3 5/8, by 2 p.m.

In a longer-term deal, a two-year strategic play was made on investment boutique

Legg Mason

(LM) - Get Legg Mason, Inc. Report

. Almost 3,500 contracts were sold on the 65 calls for January 2000 at 6, or $600, each. Legg Mason's stock was at 56 9/16 when the trade was done.

Bein said it is likely the buyer doesn't even want to exercise the option in two years, but instead is hopeful that continued consolidation in the securities industry or possible takeover buzz on Legg Mason could push the value of the option higher for resale. "If there gets to be some talk, that call option could go to 10 easily -- and that's about a 40% return," Bein said.