Heavy Trading in AOL, Dell Leads Tech Options Plays

Expiration holds some potential moves for tech players.
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Tuesday's closing bell signaled the approach of earnings from

Dell

(DELL) - Get Report

, and the numbers turned out to be strong enough to push other heavyweight technology stocks through their nearby options strike prices.

Dell, for instance, saw its stock rocket 3 3/8 to 44 1/2, through the 42 1/2 call-option strike price. "Think of the strike price as a basket," said Dave Schultz of

Summit Capital Holdings

, a Falls Church, Va., investment manager. "The stock price has to get close

to the strike price and then it can move right in. The big open interest really provides a boost," because options market makers are often buying and selling the stock late Friday in an effort to even out the price and land it squarely on the strike price. (It's a strategy known as "pinning" the stock.)

Dell appeared to have something to prove with the earnings, and the results ultimately summoned up a one-two punch to open interest in tech options, said Rob Kovell, head of

First Options

in San Francisco and a market maker in

America Online

(AOL)

on the

Pacific Exchange

.

"Normally in August expiration you wouldn't have seen this big of an open interest," Kovell said. "Probably it's related to Dell's earnings, which really were dynamite. A lot of people were watching that number" for signals about playing the rest of the tech sector.

Options traders had already been taking note of the five-digit open interest in some tech bellwethers:

Intel

(INTC) - Get Report

, America Online,

Microsoft

(MSFT) - Get Report

and Dell.

It's important for investors to understand open interest, the number of contracts that exist at a certain strike price and expiration month, and what impact it can have on the stock. "It's really a lot this month," remarked Schultz. If a boatload of investors are piling into a few strikes, by month's end the open interest in those options can reach staggering proportions.

"First, you need to decide whether these are smart or stupid people," he said. "Whenever something's at an extreme -- when that many people are in one thing -- they normally can't be right."

Not everyone agrees that a fat open interest carries that much weight. "I wouldn't make too much of it at all," said a market maker in Dell. "If you're a believer in Dell, which has been good to investors over the past few years, it's a pretty good bet. It's a very cheap bet, in fact."

America Online's 100 calls are a good example, with open interest climbing to 32,668 from 30,365 between Monday and Tuesday. That means that as of Tuesday, there were 32,668 contracts betting -- hoping and cheering -- that the stock would hit 100. By midday Wednesday, AOL was trading slightly over 100.

Dell and Microsoft had similarly deep open interest in strike prices around their current stock prices. Those contracts could exert pressure, depending on Friday's stock moves.

If the share price gets too close to the next out-of-the-money strike, pros who sold those contracts could start buying them back and simultaneously dumping the stock they had bought to hedge.

Their other choice would be to buy more stock to meet their obligations, a factor that could drive the share price higher.

"Will all these options roll over into September? "If they do in just one stock, say, Microsoft, investors may be betting on the company settling with the

Justice Department

," Schultz said. If they do "in all of these, people seem to be willing to bet on a huge tech rally going into September."