Net Option Plays Stay Expensive

Today's rally keeps the cost of speculation amazingly high. Plus, some takeover chatter in Lockheed Martin.
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Again, there is just one story in the market today, and that story is the Internet.

Speculators are taking stocks such as

Yahoo!

(YHOO)

,

Amazon

(AMZN) - Get Report

and their cousin

E*Trade

(EGRP)

along for a ride that is scaling heights possibly never seen in the gray canyons of Wall Street.

Within those gray canyons, battle-hardened veterans of the game are basically staying in their foxholes until the clamor dies down. "I'm not going near them," says Jay Shartsis, the head of options at

R.F. Lafferty

, a specialized New York brokerage. "There's no way to analyze them."

Shartsis says the volatile movements of the stock make even trying to get conservative, risk-reduction positions a dangerous mission as the stocks crash through strike prices in scenes reminiscent of a

Beverly Hills Cop

car chase. "I've had clients sell out-of-the-money calls on these stocks, but it turned into a situation where you sold them for 4 and had to buy them back for 106. You get your head taken off," he says.

The situation was much the same today. Near midday, Yahoo! was up almost 30 to 277. If an investor wanted to buy a January 280 call -- about three bucks out-of-the-money -- the ante would be 22 1/4 ($2,225). That sum is about 13 ($1,300) more than that same investor would have paid on Christmas Eve.

Yet there were players. More than 450 of the January 280 calls and about 300 of the January 270s -- which cost a hefty 26 1/2 ($2,650) -- changed hands this morning. More telling, perhaps, was the reticence of investors to play the other side of the equation.

The bodies of put buyers litter the Net-stock landscape, but there was some play at the January 250 put strike today. With open interest standing at just over 650, more than 760 of the contracts traded today, action possibly initiated by put sellers who look at the 9 3/4 ($975) as free money. The traffic also could have been traders closing the puts they bought in a less frothy time.

Online brokerage E*Trade, hammered through the middle of 1998, put together another strong day today, riding the coattails of the rest of the Internet sector. Its shares were up 13 to 58, and it had run out of new strike prices by midday.

The January 50 call, the highest strike in the E*Trade chain, saw volume of more than 550 and was trading at 10 1/4 ($1,025), up 7 5/16 ($731.25) on the day. The stock was trading at just over 12 in early October.

There was some mild takeover speculation in

Lockheed Martin

(LMT) - Get Report

today after a news report said

GE

(GE) - Get Report

might be taking aim at the company, according to

1010WallStreet.com

.

Lockheed was trading at 84 5/16, up 3/16 today, but its January 90 call volume reached 192 against open interest of just over 300 contracts. The January 80 call volume outpaced its open interest, trading 123 contracts.

Takeover players typically buy out-of-the-money or barely in-the-money calls in the anticipation that a bid, or rumors of one, drives up the share price enough to reflect itself a major price gain in the options contract.

With more than two weeks remaining the January expiration cycle, buying the January 90 calls for 1 11/16 ($168.75) doesn't appear too risky because there's enough time for something to develop before time decay eats too much value off the premium.