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Merger Signals From Options Get Muddled

But JDS Uniphase call buyers hit it right on the head.

Whoever pumped more air in the bull-market balloon also blew some speculative winds around potential merger-and-acquisition candidates.

Options activity can be difficult to sort out, as was the case with

JDS Uniphase

(JDSU)

. A week ago, some deep, in-the-money call options were active, and buyers of calls are often betting the stock price will rise in future.

JDS Uniphase, however, has been reported to be on the acquisition trail, which typically would point to a dip in the stock price.

That day

last week, with JDS stock at 145 1/8, the most active options were the December 140 calls, trading at 14 1/8 ($1,412.50). (

TheStreet.com's

Kevin Petrie had

written about how the company has been able to use its stock as powerful currency for acquisitions).

Then today, JDS

said it would merge with

Optical Coating Laboratory

(OCLI)

in a stock deal valued at $2.8 billion. JDS is up 4 to 195 5/8.

Those same December 140 calls in JDS Uniphase are now trading for roughly 65 ($6,500).

Similarly, out-of-the-money calls in

Network Peripherals

TheStreet Recommends

(NPIX)

were bid up sharply, though the trading volume was fairly thin.

The company reported earnings roughly two weeks ago. Moreover, another important clue to jot down is volatility: This past summer, volatility in Network Peripherals' options was in the low 90s and has hovered around those levels ever since. That shows a more permanent take on the range which the stock can move, in either direction.

Out-of-the-money calls are those call options trading above the stock's current price. So with Network Peripheral's stock at 31, up 15/16, November 35 calls still had gained 5/16 ($31.25) to 1 7/16 ($143.75).

Forest products' company

Champion International

(CHA) - Get China Telecom Corp. Ltd. Sponsored ADR Class H Report

reported

earnings last month, but the stock has been on a tear even so. Champion is up 1 5/16 to 61, and the December 70 calls have shot up 1 5/16 ($131.25) to 1 7/8 ($187.50).

Unusual activity is unusual for a reason. The rarely heard-from

RareMedium

(RRRR)

, an Internet services firm, registered a huge trade in long-dated puts.

Roughly 3,300 May 12 1/2 puts, due to expire in the year 2000, crossed at a price of 2 3/8 ($237.50) against open interest of just 50 contracts.

It's tough to tell if it was a seller or a buyer of puts. But let's assume an investor sold them to the Amex market maker, and the company is bought out -- those puts expire worthless.

"It was an $8 stock a month ago, and the seller of options is confident the stock is going to hang for a while," says Paul Foster of

1010wallstreet.com

in Chicago. "Usually stocks retrace themselves, so that gives some indication that the seller has some conviction about the direction of the stock price."

Rare Medium stock was down 7/16 to 16 1/16.