*Extra* Nextel Calls Burn Buyers After Merger Rumors Fade

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Funny thing about

speculation. It can cut both ways. Options investors who bought into the

Nextel Communications

(NXTL)

merger rumor yesterday are finding that out today.

Many investors who bought in on the expectation of a hefty buyout premium were left holding dwindling paper as the November 25 calls, popular as cold drinks in hell just 24 hours ago, couldn't find many takers today. Yesterday's calls lost almost two-thirds of their value in one day, sinking from 1 yesterday, or $100 per contract, to 3/8 today ($37.50).

Nextel's stock reached as high as 24 1/4 yesterday as talk surfaced that

MCI Worldcom

(WCOM)

was interested in buying the company. It settled yesterday at 23 3/16, up 2 3/16, although volume wasn't that high. Today, the stock slid to 22 7/8, down 5/16, as the merger rumors receded.

Larry McMillan, head of eponymous

McMillan Analysis

, this morning pointed out the potential danger in the takeover play in his daily newsletter. McMillan said the stock's movement was because of the merger rumors that Nextel's management had denied. The stock was hitting resistance between the 23 and 24 price levels, he noted. McMillan could not be reached for further comment.

In all, Nextel moved 4,977 options contracts yesterday, almost four times the daily average, with the November 25 calls trading heaviest at 780 contracts moved. Indeed, call volume in Nextel outpaced put volume by more than 4.5 to 1. Today, volume was much more subdued, according to Roma Colwell-Steinke, an options trader in the

Chicago Board Options Exchange

pit that trades Nextel.

"Options got very expensive yesterday, but there is nothing today -- a few people trying to sell calls, but that is it," Colwell-Steinke said. Today, option volume is ticking much closer to Nextel's daily average of 1,280 contracts.

One factor possibly pumping the rampant speculation yesterday was an optimistic research report by

Prudential

analyst Chris Larsen. The report recommended a strong buy on the stock and gave a 12-month target price of 32. The report did not mention a takeover possibility.

Larsen said a lot of different things are going on with this company, and he doesn't want to take credit for the run-up, but admits his report could have been a factor. "But I don't believe the company thinks it will be taken over," Larsen said.

A Nextel spokesman did not return phone calls.

Paul Foster, chief options strategist for

1010 Wall Street.com

, said the report may have goosed investors -- especially the 32 target price -- but he is uncertain where the rumors came in. "I don't know how it changed into that," Foster said.