Qualcomm Zooms as Options Players Grow Edgy

Volatility fails to slip as a stock-split confirmation grows near.
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Monday's trading once more focuses on


(QCOM) - Get Report

, which again is upending traditional options-trading rules. This time the spotlight is on volatility, the key measure of risk in options pricing.

Last month,


highlighted the

treacherous trading in Qualcomm options, and how the stock's moves were making it difficult to trade the options and to hedge against an options position with stock.

Think of volatility as the amount of risk an options trader is willing to take to trade the option. Qualcomm has been one of the riskiest options to trade because of the underlying stock's wild price swings.

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For instance, since this column last mentioned Qualcomm Nov. 17, the stock has risen some 20%, hitting a new high Monday of 417 1/2. Lately Qualcomm was up 22 1/2, or 5.7%, at 414.

Generally, options traders account for risk in an option with volatility, a percentage they plug into trading models estimating the amount the stock is expected to move annually. (Some traders use


, and others use their own proprietary models, but all traders derive options prices using volatility and other factors.)

Monday, traders could have been taking comfort in the knowledge that the Qualcomm shareholders are scheduled to meet in the next week or so to approve the 4-for-1 stock split the wireless-technology provider set last month. That should have reduced volatility, which measures uncertainty regarding a stock's direction, because many traders are expecting the stock to continue its flight after the split takes effect.

But volatility's not budging, according to at least one Qualcomm options market maker on the

Pacific Exchange

. "We've brought it in slightly from around 80 on Friday to the mid-70s Monday," said the


market maker. "But what we've really noticed is that the textbook doesn't work. When I learned to trade options, and call prices went through the roof, people would sell, and that would help knock the volatility down as well.

"But it's such a speculative frenzy," the trader continued. "Now they just want to buy the December 500 calls," which were fetching about 1/4 ($25 per contract). "Maybe it's just because the stock is getting so much more expensive to own outright. We're mystified."

If an investor did think the stock would pop on next week's expected confirmation, the only way to play that in the short term would be with January options. (December options expire at the end of this week.)

And so they are.

Merrill Lynch

sold roughly 6,000 Qualcomm January 320 puts at prices ranging from 7 3/4 ($775) to 8 1/4 ($825). (A put gives the buyer, or owner, the right to sell stock at a specific strike price in the future; often put-buyers are making a bet the stock price will fall; put-sellers, meanwhile, are wagering the stock won't fall.)

Tyco's Back

Elsewhere in options trading,



stock was recommended by a whole range of analysts Friday, and the stock Monday added 1 5/8 to 32 1/16.

Several class-action lawsuits were filed against the company, not unusual when a stock drops so far so fast. But there are strategies for aggressive traders who aren't afraid to take the unpopular stance that the


informal inquiry is "routine and that there is no accounting fraud," said Larry McMillan, head of the

McMillan Analysis

options trading and advisory firm in Morristown, N.J. For instance, one could "consider selling expensive out-of-the-money puts naked," or without hedging with the underlying stock, McMillan said.

Tyco's December 25 puts, for example, were fetching 1/4 ($25). January 25 puts were trading at 15/16 ($93.75), and even further out in time, April 25 puts were going for 2 1/2 ($250).