Options Players Fall Back on the Old Favorites

With the FOMC meeting absorbing much of the market's energy, AOL options take a familiar leading role.
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The stock market may be holding its breath ahead of a key interest-rate announcement, but options investors were busy sprucing up positions in the usual suspects:

America Online

(AOL)

,

Dell

(DELL) - Get Report

and

Microsoft

(MSFT) - Get Report

.

Internet bellwether AOL was among the most actively traded stock options, and a confluence of events this week could make for dynamite trading: AOL chief

Steve Case

is set to make a presentation to analysts, the stock has moved in a 50-point range over the past month, and expiration for May-series equity options arrives Friday.

"Volatility in AOL is a little lower, and with such wide price gaps there may be less legitimacy on the bid side, as well as on the offer side," said Paul Foster of

1010WallStreet.com

. "A lot of people may simply give up on the May

options in AOL and just try to roll into the Junes." Implied volatility in AOL options is roughly 80, down about 15% from historical levels, he added, making the June series in AOL "fairly cheap."

Volatility measures the amount by which an underlying security is expected to fluctuate over a period of time and is factored into the price of an option.

AOL May 140 calls were among the most active, with those trading on the

American Stock Exchange

dropping 9/16 ($56.25) to 2 13/16 ($281.25) on volume of more than 1,500 contracts, compared with open interest of 24,438 contracts. AOL stock was flat at 136 1/8.

Meanwhile, the usual suspects in takeoverland --

Cabletron Systems

(CS) - Get Report

,

Raychem

(RYC)

and

e.spire

(ESPI)

-- so far hadn't produced any takers.

Raychem call options "sold off fairly heavily when traders faced the reality that no takeover bid was received over the weekend," wrote Larry McMillan of

McMillan Analysis

in a Tuesday research note. Raychem May 30 calls slid 7/16 ($43.75) to 11/16 ($68.75) in light volume of 160 contracts. Open interest totaled 2,912 contracts. The stock was up 1/16 to 29 7/16.

Cabletron "is still trading like a takeover target, and the June 10 calls and 12 1/2 calls are trading like it's going to happen too," said one Philadelphia-based trader. "It's still a cheap bet for someone, but the idea out there now is that perhaps an acquirer would be a European company, an

Alcatel

(ALA)

or an

Ericsson

(ERICY)

. However, which of those actually needs Cabletron that much?" The June 10 calls gained 7/8 ($87.50) to 2 7/8 ($287.50), while the June 12 1/2 calls rose 3/16 ($18.75) to 1 1/2 ($150).

e.spire calls "were trading at ridiculous levels," said the trader, and were due for a pullback. e.spire has been on options investors' radar screens for weeks now as an acquisition candidate. With the stock flat at 13 5/8, the May 15 calls were down 1/8 ($12.50) to 3/16 ($18.75) oi thin volume, and September 17 1/2 calls slipped 1/16 ($6.25) to 1 5/8 ($162.50) on volume of 500 contracts. Open interest totaled 741 contracts.

Meanwhile,

Reynolds Metals

(RLM) - Get Report

continues to see higher implied volatility priced into its stock options, perhaps hinting at some sort of merger as well. However, given that news on the interest -rate front may swing the stock market, bets in cyclicals such as aluminum giant Reynolds may represent a hedge against another market drop and further rotation into cyclical stocks.