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Knight Options Play Dallying with Danger as Stock Rallies

On the morning after it became apparent that




J.P. Morgan

(JPM) - Get JPMorgan Chase & Co. (JPM) Report

would be joined in a gilded matrimony, options traders seem split on their opinion of securities firms.


market maker

Knight Trimark


, for one, was seeing raucous volume in its options, as call option buyers expecting the firm to be the next target of a larger broker looking for an entree to the trading business played for a dramatic appreciation in Knight shares.

With its shares up 5.69 to 35.13, Knight's September and October call options were burning up the tape. But the heavy trading in September options may be reflecting investors not usually regarded as "smart money." The reason: September options expire at the close Friday and while there could be some sweet short-term pop in the shares, a 20% run-up like today's could lead to a slide before the end of the week if a deal doesn't materialize.

That leaves options such as the September 35 calls -- which showed volume of more that 6,000 contracts today -- trading at 2 11/16 ($268.75) today vulnerable to a quick fall if speculation dries up heading into the weekend.

The so-called "smart money" is more likely to gravitate to the October calls, where volume has also been brisk.

Merrill Lynch

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, on the other hand, wasn't getting much love in either the equity or the options market today.

With its shares off $3.44 to $68.69, Merrill's October 65 puts traded more than 2,500 contracts and skipped up 5/8 ($62.50) to 2 3/8 ($237.50) in early trading.

Action in the mini-Nasdaq 100 options -- lovingly referred to as the MNX -- at the

Chicago Board Options Exchange

has been brisk, reflecting the Nasdaq's recent twists and turns.

This morning, more than 2,100 of the September 380 calls traded as the index rose 3.58 to 370.27 by midday.

One pro at Wolverine Trading -- which is the primary market maker in the MNX options -- said the volume lately has been led by options sellers, looking to take in options' premium against the chance of a dramatic move in the index.

The mini-NDX contract was recently launched to compete with the

Nasdaq 100

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unit trust and accompanying options traded on the

American Stock Exchange


"It turns around fast though," the trader said, because there's also been some speculation chasing the index by buying puts as well. "When it falls we have put buyers, when it rallied up we've had call buyers."

The trader said put buyers -- who pay for the right to sell the index at a preset level by the option's expiration -- had been active as the Nasdaq slide the past few sessions, though put sellers returned yesterday. Put sellers typically are bulllish, because they're selling put options they hope will expire worthless because of a rise in the index.