Despite Uncertainty on Ruling, Microsoft Call Options Are in Demand

Also, the Clinton Administration's endorsement of ethanol buoys ADM calls.
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While shares of


(MSFT) - Get Report

were suffering a bit of a beating in the market, there was solid demand in the options market for Microsoft call options.

At midmorning, Paul Foster of

in Chicago pointed out that volatilities were robust in Microsoft as traders await the outcome of the latest chapter in the government's antitrust case against the software titan. Foster noted that the volatility for the Microsoft April 105 calls was 55, while it was 51 for the puts. Buying a call is a bet a stock will rise, while buying a put is a bet it will fall.

Volatility is a key factor in pricing options. In order to make it worth their risk to trade these options, floor traders use volatility, a percentage they plug into trading models estimating the amount the stock is expected to move annually.

Microsoft's stock fell after it was

reported that the company made a proposal to settle the antitrust case against it, with which the government was less than impressed. If a settlement isn't reached, the judge in the case could issue his ruling as early as Tuesday, and those conclusions aren't likely to be very favorable for Microsoft.

At midday, shares of Microsoft were off 5 7/8 to 105 13/16.

Microsoft April 105 calls were active with a total of 8,432 contracts trading on the

Pacific Stock Exchange

. The Microsoft April 110 calls were also active on the Pacific, with 4,512 contracts traded. The April 105 calls were at 7 1/2 ($750), down 3 ($300). The April 110 calls were at 5 1/8 ($512.50), down 2 1/4 ($225).

None of this is to say that there hasn't been any put action in Microsoft, or bets the stock would fall. The heaviest action was in the July 95 puts, where 4,344 contracts have traded. The July 95 puts were lately at 5 ($500), up 1 1/8 ($112.50).

Last week, people were taking sizable call positions in

Archer Daniels Midland

(ADM) - Get Report

, the agribusiness giant and mammoth ethanol producer.

The call buying came in the wake of a press conference last week by Carol Browner,

Environmental Protection Agency

chief, and Dan Glickman, the

Agriculture Department

secretary, who unveiled


administration moves to urge


to eliminate the fuel additive MTBE and to promote the use of renewable additives, like ethanol.

According to a

Morgan Stanley Dean Witter

research note, "the Clinton administration's endorsement of ethanol as a replacement for MTBE is a positive for ADM and ethanol producers, but because Congressional action is still required, it is too early to declare victory for ethanol."

On Thursday, total volume for ADM options was 1,800 contracts, 1,300 of which were May 10 calls. Foster at pointed out that the average volume for ADM is 220 contracts.

The average volatility for ADM is 34, while today the ADM volatility for the April 10 calls was at 53, lower than it was last week. Volatilities in the options spiked last week and the May 10 calls were still trading at a volatility of 65, he said.

Today there was some action in the May 10 calls, with 380 contracts trading. The May 10 calls were last at 1 1/8 ($112.50), down 3/8 ($37.50) from Friday. There was also action in the September 10 calls, with 100 contracts trading. The September calls were last at 1 3/8 ($137.50), down 1/8 ($12.50).

As for the underlying issue, shares of ADM were trading down 1/4 to 10 1/4.