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Options Players Cautious in M&A Plays

Newbridge call-buyers end up on the losing side of its deal with Alcatel.

Pick your romances wisely, and beware the heat of merger-and-buyout fever that can fade in a flash.

So much boiling

speculation in

Newbridge Networks


ahead of a long-rumored buyout resulted in the stock tanking 1 13/16 to 32 9/16 Wednesday when the actual

deal was announced. March 35 call options, the logical play for speculators expecting a deal, shed 2 3/4 ($275) to 1 ($100) as a result. So much for the joy of options, huh?

Still, on a day when deals were everywhere, there were hints in some companies' options that could have given some investors clues on the deals more likely to happen.

Take a look at the call options in

Mirage Resorts


. The gaming company Wednesday got an unsolicited $17-a-share

bid from

MGM Grand


, and Mirage stock has definitely perked up on the news, 3 1/8 to 14.

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But over the next few months, fewer traders seem willing to wager the deal will go through. Take the April 15 call options on Mirage; the owner of this call option holds the right to buy Mirage stock at 15 in April. They were trading up 13/16 ($81.25) to 1 1/16 ($106.25), a big move, but if the deal gets done at 17, there would be a $2-a-share premium. In essence, they're dirt cheap.

"Those April 15 calls are just not being priced out as much as they should," said Michelle Skupp with

Miller Tabak

options trading firm in New York, adding that the price offers a big hint that buyers of these options aren't willing to pay up in full for a bet the deal will go through.

They likely understand that Mirage's flamboyant chief

Steve Wynn

"is not likely to want to sell," Skupp adds. In the current, or front-month, options, the most active are the March 10 calls, up 2 13/16 ($281.25) to 4 7/8 ($487.50) at midday.

Skupp outlined a short list of call-buying she's been watching:

Hollywood Park



Becton Dickinson

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, all "discount value names, with high yields, that no one seems to want."

On Mirage-MGM, Tom Burnett with

Wall St. Access

feels that in a highly regulated industry, it's easy for an unwilling target like Mirage to throw up roadblocks to a deal. "Wynn could go to the gaming commission, claim it's bad for the industry, bad for the job and tax rolls. Wynn will say 'shove off.'"

Nonetheless, Burnett agreed that "deal flow is breathless right now," and he said there's plenty of premium to be had in M&A in the financial sector.

"I'm shocked at how little activity there's been, particularly with the elimination of

Glass Steagall

. The high-interest-rate policy has decimated the sector, and good companies have traded even lower because there's been no takeover activity." He pointed to


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Summit Bank



First Tennessee


-- "This is the unsung story. Banks were waiting for Y2K to pass to do any deals; pooling is going away, and there's bound to be some activity," he said. "And I'm not even long these stocks."

And among the most active deal-related options Wednesday were in

America Online


, the M&A story of the New Economy. Roughly 10,000 March 50 calls traded for 6 3/4 ($675), up 3 1/2 ($350).

Bullish comments out of

Merrill Lynch

on AOL and

Time Warner


worked their

magic on the Internet sector and the stock, which bounced out of its valley, up 5 7/16 to 55 1/16 on word that maybe the marriage to Time Warner wasn't so bad after all. Paul Foster of

in Chicago

predicted Wall Street brokerage houses would rally around AOL and kick the stock back to life.