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Mixed Day Makes Call Writing Worthwhile

Takeover rumors about Case and SBC Communications persist.

If ever there was a day to hedge bets using options, it may be today.

Why? Takeover rumors persisted among names as diverse as




SBC Communications


, and call options were active on both names. There were no apparent themes generated by the market's early morning attention to a potential interest-rate bias.



(MAT) - Get Mattel Inc. Report

calls followed the stock price higher, with the May 27 1/2, May 30 and June 30 calls trading up in noteworthy size. The toy company's share price gained 7/8 to 28 5/16.

Mattel's out-of-the money calls saw the heaviest trading action, as the May 30 calls rose 3/16 ($18.75) to 11/16 ($68.75 per contract) on volume of 8,550 contracts, compared with open interest of 2,889. June 30 calls rose 1/2 ($50) to 1 3/8 ($137.50 per contract) on volume of 2,939. That's against a measly open interest of 60 contracts.

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But back to the takeover teases: Case and SBC. Case shares were trading up 1 7/16 to 40 5/8, and as options dean Michael Schwartz of

CIBC World Markets

points out, Case options represent, no pun intended, "a very simple case for covered writes." (A CIBC analyst issued a research note on Case Tuesday morning, but the firm, Schwartz says, hasn't done any banking for the farm-equipment company).

Yesterday, Case broke new highs on strong stock and option volume, with high implied volatility in its options, and at least three companies have been mentioned as suitors. Case late Monday finally returned a phone call, but declined to comment on the rumors. "We have no announcements at this time," said a Case spokesman.

In such ambiguous situations, "covered writes," as they're called, can be done with both puts and calls to play both sides of a potential deal.

Primary is a strategy in which an investor writes call options while simultaneously owning, or shorting, shares of the underlying security.

Schwartz said his in-house analyst is already projecting a fundamental price target of 40 to 45 a share, and rates the stock a "buy" due in part to the increasing merger-takeover speculation. "With that in mind, I'd be recommending October 40 calls. At that strike price, plus the premium, you get the potential

in this option for something equal to that target price of 45." CIBC World Markets is projecting that in a takeover, Case would be paid the equivalent of 55 to 60 a share, Schwartz added.

Case October 40 calls gained 1 3/4 ($175) to 7 7/8 ($787.50) on volume of 243 contracts, against open interest of 351. June 40 calls were also active, up 1 1/2 ($150) to 5 1/4 ($525) on volume of 1,062, outstripping the open interest of 837.

Finally, SBC Communications also "may present an opportunity for some sort of covered call write," said Tom Burnett of

Wall Street Access

. "You buy the stock and sell the call at the same time. It's a bullish play, but not completely outright bullish."

If the stock were to hit its strike price, it would be called away at expiration, but the premium and the appreciation in the stock price would go to the covered call writer.

SBC Communications June 55 calls were going for 1 3/8 ($137.50 per contract) on volume of 3,041, compared with open interest of 7,022. The stock was down slightly, 1/8 to 52 13/16.