Spinoff Players Watch Metamor Call Options

And the Nasdaq call-writers take a bath.
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Spinoffs may be hot for most investors these days, but once they turn into IPOs, they're temporarily off limits to options traders, except for some who are finding a creative way to play their parent companies.

Xpedior

, an e-commerce consulting company, is about to be spun off from its parent,

Metamor Worldwide

(MMWW)

, in an initial public offering scheduled for Dec. 15. Xpedior is in a roadshow this week in New York and Boston, and the company was being compared with rivals

Scient

(SCNT)

and

Proxicom

(PXCM)

.

Metamor (yeah, it sounds like a breakfast protein supplement) has zipped up 10 points since Nov. 30, quite a run in advance of the Xpedior spinoff.

The primary reason is the potential to get a piece of the spinoff. Metamor is spinning off just under 20% of Xpedior, and the remainder will go back to Metamor shareholders. "If you own one share of Metamor, you will own 1.2 to 1.3 shares of Xpedior" after the spinoff, explained Tina Larsson, an analyst with

The Spinoff Report

.

So, if the idea is that Xpedior's IPO is going to take off -- and Metamor with it -- why not just run out and buy a December call option, which would give you the right to purchase 100 shares of Metamor at a certain price?

Well, first thing is that the Xpedior IPO is scheduled for Dec. 15, and December options expire at the end of that same week. Second, Metamor options this week turned super-pricey. December 35 calls are up 1/4 ($25) to 4 1/8 ($412.50) just today, mostly because the implied volatility in the options suddenly shot up to the low 90s ahead of the spinoff.

Better to give yourself some time for the call-option bet to play out. "You're betting on the Xpedior spinoff exploding, so better to buy some out-of-the-money calls dated in January or even March 40 calls," theoretically priced at around 5 ($500) per contract, said one options veteran.

Holders of later-dated options won't get any Xpedior shares, but they can benefit from Metamor positions because the parent company will retain an ownership stake in Xpedior.

And though the Metamor options are expensive, "in the real world, that's not inconsistent with any other Internet issue," the trader said, adding that the play is not for the faint of heart. "I would have to watch the options day and night, and then I wouldn't sleep."

So Metamor's options are expensive, but its spinoff, Xpedior, is profitable, while peers Scient and Proxicom are not. As of Friday, Proxicom traded at 24 times its 1999 revenues. A similar multiple would put Xpedior at a trading range of $60 a share, Larsson said.

On Monday, some traders were predicting that

Nasdaq

volatility would decline and, to profit from that, it might be a good idea to

sell some calls on

Inktomi

(INKT)

,

America Online

(AOL)

and

CMGI

(CMGI)

.

Call-sellers essentially fall into the neutral to mildly bearish camp, speculating that the options they sell will expire worthless because the price of the stock won't appreciate enough to push them into the money.

Those Inktomi January 180 calls you would have sold to some salivating investor? Monday, they were fetching 11 3/8 ($1,137.50), and the January 190 calls were going for 8 3/4 ($875). By Thursday, with Inktomi shares up to 166 from 158 Monday, they were trading at 15 7/8 ($1,587.50) and 11 1/4 ($1,125) respectively, so the option sales were a loser.

Internet blue-chip AOL's January 85 calls sold for 6 1/4 ($625) per contract Monday; Thursday, they were trading at the same price as those shares flattened out.

Also on Monday, CMGI January 175 calls were trading at 21 3/8 ($2,137.50); Thursday, they were fetching a whopping 46 ($4,600) as the stock ran to 191 to 168 over three days. Ouch.

For months, the

International Securities Exchange

has been guarding the identities of the big Wall Street market-maker firms expected to join the all-electronic options exchange. On Thursday, the full list was out.

The ISE's seven primary market-maker members are

Arbitrade Holdings

,

Arbitrage Group

,

Bear/Hunter Specialists

,

Deutsche Bank Securities

,

Goldman Sachs

(GS) - Get Report

,

Hull Group

,

Knight/Trimark

(NITE)

and

Morgan Stanley Dean Witter

(MWD)

.

In addition to these seven PMMs,

Adirondack Trading Partners

will operate two PMM memberships and is looking to sell or lease the final, 10th membership. "ATP is considering the formation of a joint venture with an established options market-making entity," said Marty Averbuch, president of ATP, which is also the consortium of broker/dealers that is funding the ISE.

The ISE includes three types of market-maker members: primary, competitive and electronic. ISE is still awaiting approval from regulators to become the first new registered U.S. securities exchange in 26 years. ISE plans to list options on 600 widely owned and popular stocks.