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Selloff Leaves Holders of Naked Puts Feeling Undressed

Don't answer your phone if you have a margin account.

"A controlled descent." That's what Jay Shartsis, options strategist with R.F. Lafferty, and pretty much everyone else on the Street seemed to be hoping for Tuesday.

Shartsis has been expecting a bearish turn for some time, but said his biggest worry this week concerns customers with positions in naked puts. They're probably about to get a phone call regarding their margin accounts. (For margin purposes, a naked put is one in which the holder of the put isn't short the underlying stock as well.)

Among the big


stocks posting losses,






popped up on the most-active options list Tuesday. Ciena's options have been active for two days running now -- in particular the October 35 puts, which were up 1 11/16 ($168.75) to 3 1/4 ($325).

Why is Shartsis wagering on more air leaking out of the bubble? "Something that disturbed us," the trader said, was that the peak open interest was in

Standard & Poor's 100

, or OEX, call options, "in particular the October 700 calls."

"That's the biggest open interest of any of the strikes, and that to me is bearish," Shartsis continued.

Come again? When more investors herd in one direction in the OEX options, options traders generally look to the other end of the field as an inverse or "contrarian" indicator. And in fact, October 700 call open interest -- or the number of contracts still open and ticking away until expiration -- clocked in at 11,650 contracts. The October 700 OEX call price was down 1 3/4 ($175) to 2 7/8 ($287.50); the OEX index itself was down 9.7 to 665.8.

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So what's an options investor to do if this is a bear market? Choices shrink when it comes to takeover deals. "There will be a washout probably, and only then will there be more deals," chimed in Michelle Hiller Skupp of the

Miller Tabak Hirsch

options team. "But even then, it won't be the way it was, across every sector, in banking, telecommunications. Not with the tape we could have."

Her firm is watching options activity in

First Tennessee National


, a bank holding company. Though the stock was slightly lower Tuesday, off 1/16 to 28 13/16, October 30 calls gained 1/4 ($25) to 7/8 ($87.50) in healthy volume and the longer-dated 2000 May 35 calls gained 5/16 ($31.25) to 2 ($200).

The legs on this one couldn't be

more tired. Implied volatility in

C.R. Bard


reached "the highest levels it's seen in a while," Skupp said, "adding yet another day to the three-year-long rumor that the company would be taken over."

So she's exaggerating. But could this be another forever-engaged-when-will-they-marry


a la






? With the stock down 7/8 to 44 15/16, C.R. Bard October 45 calls slipped 2 ($200) to 2 1/4 ($225).

Among individual options without a news tag,



stock continued to slide, and the puts ratcheted up in price. October 22 1/2 puts shot up 1 3/8 ($137.50) to 2 ($200), and November 20 puts gained 1 ($100) to 1 3/8 ($137.50).






also topped the most-actives list Tuesday, showing the markings of a "roll" into a later-dated option strike price.

In the case of TJX, an investor appeared to sell roughly 5,200 contracts in the October 25 calls at 3 7/8 ($387.50), using that money to finance rolling the bet over into a later-dated option, 5,200 contracts in the 2000 April 25 calls at 6. (Notice that the strike price is the same.) The stock traded at 28 9/16, up 3/8, at midafternoon.

Wendy's saw about 2,000 contracts trade out of the December 22 1/2 calls and into the 2000 March 22 1/2 calls. With only a slight difference in price -- the December calls sold for 3 7/8 ($387.50) and the March for 4 1/2 ($450) -- the investor could roll out a bet to a later date.