Lycos/USA Networks Deal Fails to Lift Gloomy Options Mood

It's a dark day indeed when an Internet deal can't lift the spirits of options traders.
Author:
Publish date:

"When in doubt, stay the heck out!"

That battle cry echoed through the empty canyons of today's options market as investors chose to sit on their cash until they could get a better read on how far the market would pull back.

Even the rah-rah potential of a

Goldman Sachs

-sponsored tech conference and another big Internet merger involving

Lycos

(LCOS)

and

USA Networks

(USAI) - Get Report

failed to spark anything that resembled heavy action today.

"I think investors are standing on the sidelines," said John Hayes, options strategist at

Tucker Anthony

. "They don't want to jump in on this until they see how far things will fall." Investors were laying the smack down on just about every major index this afternoon. The

Dow

was down more than 100 points, and the red ink in the

Nasdaq

topped 60 points this afternoon.

"We're seeing people trying to get short the tech companies," said Leon Gross, options strategist at

Salomon Smith Barney

. "As a result, we are seeing some isolated put-buying and call-selling." And far from driving markets up on the big Net news of the day, the Lycos deal actually was turning investors off in droves. Lycos was down more than 20% to 101, dropping 26 1/2, this afternoon, and its options were anything but jumping.

Despite the prospect of the multibillion-dollar deal, Lycos call options were hardly budging. The front-month, near-the-money stuff was just sitting on the shelves, even with the relatively cheap price tag. Most active were the February 140 calls, which traded about 720 contracts -- less than half of the open interest in the strike. The calls were going out at around 3/4, or $75 per contract, after falling with the stock from their previous close of 6 1/4, or $625 per contract.

Also seeing some action on the call side were the February 120s, which traded about 400 contracts, and the February 130s, which moved about 480 contracts. The March strike prices were even less active.

Tucker's Hayes said that, like in the general options market, investors are staying away from the Lycos deal until they can get a better understanding. "Personally, I'm staying away, too," he added, hinting that it is a difficult deal to evaluate now.

Hayes said he was recommending that his clients get into some of the lesser-played tech options, such as

Novell

(NOVL)

and

MTI Technology

(MTIC)

, which haven't seen big run-ups and remain relatively cheap.

For example, Novell was up 1/2 to 19 on a disastrous day for other tech companies and saw some isolated action in its February 20 and March 20 call options. "Hey, these companies have real earnings," Hayes said. "I think the market is migrating toward these types of companies."

In the rest of the options market, index plays looked to be attracting more attention this afternoon. The

Standard & Poor's 100

index, which was down 7 to 614.7 this afternoon, saw some heavy action in the February options. Interestingly, puts far outpaced calls in the near-the-money strikes, from the 600s to the 620s; then calls rallied, beating out puts in the strikes 625s and higher.

TheStreet.com Internet Sector

index also saw some put action. The DOT's February 370 puts traded 300 contracts, against only 30 contracts in open interest. Even with the DOT down 33.26 to 471.59 today, the February 370s were far out of the money, making it likely that the investor was creating a sort of inexpensive artificial short in the DOT, hoping the put options would rise in value if the DOT continues to fall.

One investor looked to be constructing a put/call calendar spread on

Delta & Pine Land

(DLP)

, whose deal with

Monsanto

(MTC) - Get Report

has been

whispered to be in trouble. Delta's February 30 puts moved 3,060 contracts, and its March 30 calls moved 4,100. Although the February puts went out against heavy open interest, the March calls was mostly new money.

It looked as if the investor was buying both sets of options, constructing a play on the volatility in these thinly traded options, said Salomon's Gross. "If he bought both, then he is thinking this stock is going to move a lot, either up or down, or up and then down." Delta's stock was down slightly to 32, off 13/16.