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Risky Calls Trade on Merrill's Short-Term Strength; Long Island Bancorp Options Still Hot

For 25 bucks,

Mother Merrill

may be worth a bet that only has two weeks to pan out. And today, it looks like someone is taking the chance with a relatively big trade in deep-out-of-the-money calls on the brokerage monolith.

Merrill Lynch


shares were cooking today, up 2 1/6 to 67 1/6, but the strength, according to many traders, wasn't enough to justify the purchase of 2,800 February 75 calls. Open interest on the series was just 683 contracts.

With February expiration exactly two weeks away, the buyer is hoping for a prolonged move. A takeover of Merrill, the only plausible reason for such a long-shot play, is an unlikely move for any firm but a major,


bank, such as

Chase Manhattan


, which has been rumored in the past to be interested. At 1/4 ($25 per contract), the options were cheap, but the time factor seems to be working against the buyer. "Whoever bought them isn't risking a huge amount of money," said Tom Burnett, a senior trading advisor at

Wall St. Access

, a New York discount brokerage. "Maybe with rates staying low and the market nearing its all-time high, someone thinks the brokerage stocks will take off."

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Another Merrill call buyer staked out a big position -- more than 1,100 contracts -- in the March 70s, a play more likely to come to fruition. Those options were trading at 2 5/8 ($262.50), up 1 1/4 ($125), today.




options trading has been off the charts the past two days and tremendous open interest has built up in the February calls at the 30, 32 1/2 and 35 strikes. Traders who are short those calls may be feeling the heat as expiration approaches. Compaq's shares have been strong, although they were off 9/16 this morning, and are at 34 5/8. The February 35 calls have open interest of 27,427 and have racked up volume of more than 6,500 contracts already today.

"If Compaq runs through 35, the guys who are naked are going to find it very painful to go out and buy those shares in the market to cover the positions," Burnett said this morning. Some of the short positions in the February 35 calls could be parts of covered-call positions. Those sellers already have the shares on hand if their options are assigned.


Long Island Bancorp


speculators are taking takeover rumors up another link on the regional bank's options chain as they attack the February 55 calls. The bank's out-of-the-money calls have been active for three days as acquisition rumors swirl (see an earlier



Most of the previous trading was directed at calls at the 50 strike price in February, March and April expirations. Today, the February 55s ran out to early volume of more than 500 contracts and their price followed, rising 1/8 to 1 1/16. The contract had only open interest of just 174 because it was a recent addition to the firm's options chain.

The bank's shares were up 7/8 to 51 3/8 today.