LEAPS and Earnings Spark Options Action

Elsewhere, techs led the activity with IBM seeing strong action after its recent earnings report.
Author:
Publish date:

Some activity in the LEAPS arena and a few earnings plays spiked interest in an otherwise quiet options trading day.

This year's LEAPS expired 10 days ago, and investors in the long-term options are staking out new positions. Many investors are using the LEAPS as a stock substitute, especially for high-priced stocks, said Bob Fogliano, a strategist in the options department of

Advest

.

"January is a very popular month for LEAPS," he said, adding that the activity has diminished somewhat since the Jan. 15 expiration.

The action in the LEAPS included an interesting covered straddle buy/write in blue-chip

Eastman Kodak

(EK)

taken by one Kodak fan apparently bullish on the stock. The investor concocted the unusual trade by selling both puts and calls in a cautiously bullish bet on the stock's upside a year down the line. He sold 3,002 contracts of the 2000 January 60 puts and 3,007 contracts of 2000 January 75 calls, establishing new positions in both, according to Tom Stotts, options strategist at

Dain Rauscher

.

The investor sold the options to the market maker and was assumed to be writing a covered straddle or to be selling options against a large long position in the stock, Stotts said. The twin trade was seen as bullish because the strike price of the puts was below the current trading price, while the calls were above. Kodak was at 65 11/16, up 3/16 today.

If the stock rises but stays below 75, this time next year, the options that the investor sold today would expire worthless with this strategy. Meanwhile, he pockets the approximately $3 million he made today selling the options.

However, all was not LEAPS today, as some investors were playing the earnings angle on several stocks. For example,

3M

(MMM) - Get Report

saw 1,761 contracts in its February 70 puts move against only 911 contracts of open interest. The puts were relatively cheap and falling in price after the company's stock price jumped this morning, up 5 11/16 to 77 on its earnings announcement. The company said this morning that earnings fell more than 40%, but since Wall Street analysts expected worse, the stock soared this morning.

The puts were near the money at the open, but as the stock climbed, the option price fell from 2 to around 5/8, or $62.50 per contract.

In the rest of the options world, techs led the activity with

IBM

(IBM) - Get Report

seeing strong action after its earnings report last week. Oddly, Advest's Fogliano said he sees a divergence in the share-price direction among the usual gang of tech stocks, even though they usually travel together. "IBM is down, but

Microsoft

(MSFT) - Get Report

is up.

Sun

(SUNW) - Get Report

is down, but

Dell

(DELL) - Get Report

is up," he said.

The price disparity can be attributed largely to profit-taking now that the earnings announcements are past for both IBM and Sun, Fogliano noted.

Iomega

(IOM)

saw some continued put action in its further-out strike prices after the company announced last week that it made a profit in the fourth quarter, reversing a losing trend. A hefty 10,020 contracts in the company's March 5 puts moved at 3/16, or $18.75 per contract, against no open interest. The puts looked to be going out under buying pressure, indicating hedging or a bet that the stock will turn south within two months.

Last week, investors drove huge volume in the company's May 7 1/2 puts, eventually amassing more than 32,000 contracts in open interest. Iomega's stock has been on a downtick for the past several trading days and reached 7 3/4, down 3/8 today.