Skip to main content

Traders and investors who were holding

puts on



blew out of those positions this morning, while others took cheap upside bets, wagering that perhaps the implosion of the high-speed networking equipment maker's stock was overdone.

In a Webcast after the close Friday, Emulex

warned that its third-quarter revenue and earnings projections might be at risk because of order deferrals for its fiber channel products.

Shares of Emulex plunged $37.25, or 48%, to $40.25.

Early in the session, action in the options was busy, but volume has slowed down. Prices for Emulex options, not surprisingly, soared.

Emulex implied volatility (a key component of an option's price and the market's estimate of how much the underlying security can move) skyrocketed. Implied volatility in March options was 150 compared to 98 on Friday, said Greg Farrall of

Scroll to Continue

TheStreet Recommends

Five Dollar Trading

in Chicago.

A good portion of the trading were investors taking profits on puts they had previously bought. By selling the puts, the investors close out their positions rather than exercise the options and profit from the trade.

"Anyone long puts was just selling them," said Farrall.

Out-of-the-money call buying was also a somewhat popular trade today. Farrall said there has been "a lot of shot taking" in Emulex


When traders take a shot, so to speak, they're buying out-of-the-money options for just a little bit of premium, making a long-shot wager that the underlying security will move sharply in the direction they want it to. In the case of the Emulex out-of-the-money call option buying today, a trader could profit handsomely if the stock does rebound dramatically.

Farrall said there was some buying of the February 50 calls, which

expire Friday. The February 50 calls dropped 26 1/8 ($2,612.50) to 1 1/8 ($112.50) on the

Chicago Board Options Exchange

on volume of about 450 contracts.