Talk to the Palm.

The Palm Computing spinoff of

3Com

(COMS)

, that is.

As popular as spinoffs have become among publicly traded telecom, technology and retail companies, it's still kind of complicated to figure out how their options will spin off as well.

It turns out you get more than just shares in a spinoff of 3Coms Palm Computing unit, and a hedge fund manager explains what to look for in big option trades. It's not what you think.

Keep the options questions coming to

Options Forum. And don't forget, include your full name with each question.

Palms Up

I hold a January 2001 LEAPS call on 3COM. After it spins off its Palm Computing branch, will I still have any exposure to Palm through this options contract? Or will my call be on a boring, Palmless 3COM? (The latter possibility would be rather disappointing.) -- Neiladri Sinhababu

Neiladri --

No need to be disappointed.

3Com plans an initial public offering of the Palm Inc. subsidiary for less than 20% of the shares of Palm. 3Com will then own more than 80% of Palm shares and it intends to distribute or "spin off" the remaining shares of Palm to 3Com shareholders as a dividend approximately two quarters after the Palm IPO.

Under this plan, 3Com shareholders will ultimately own shares in both companies. 3Com intends to complete these actions in calendar 2000 subject to market conditions.

However, the exact timing, structure and other terms for this distribution have not yet been determined. 3Com's Board of Directors has to approve the distribution, which is contingent on the receipt of a favorable tax ruling and other matters. Keep in mind that 3Com's board is not obligated to approve the distribution.

You can find further details in Palm's S-1 registration statement, dated Dec. 13, 1999, which is available through

Edgar Online.

If the deal is approved by 3Com's board, options exchanges will publish adjustment bulletins notifying 3Com option investors of the new deliverables, which will incorporate the Palm shares. You'd have the same contingent "claim" against the Palm IPO shares and future distributions, during the life of your LEAPS call, as a 3Com shareholder.

Stay tuned to 3Com's Web site (

www.3Com.com) and the

Chicago Board Option Exchange's

Stock Splits & Mergers pages for updates.

Mixed Signals

I'm long IBM (IBM) - Get Report, and would like to know: Why is large call selling bullish for a stock? I am generally interested in trying to better understand the relationship between options and the underlying stock. For instance, here's a big sale of calls I saw one day: 12,600 options in one series. That seems significant, but to hedge it is only 1.3 million IBM shares. IBM volume was 15 million shares yesterday. Sometimes, I see a trade go through of, say, 3,000 options in Dell (DELL) - Get Report and I think "somebody knows something!" In those cases, can I read nothing into the large trade? --Neil Lusby

Neil,

We consulted Ed Borgato, the manager of

Javelin Partners

in Las Vegas, Nev.

He reminds us: "Options don't kill portfolios, people who use options improperly kill portfolios."

What he means is, it's important to understand what options are and what they can tell you.

First, he says, it's tough to distinguish what bid option trades mean in liquid names like IBM and Dell; and second, what's more important in a trade like that is to compare option-to-option volume, not option-to-stock volume.

"Looking at large trades is helpful in options if you compare that trade to open interest and how it relates to how the trade went. If you see 1,000 options printed on the screen, it's difficult to know what happened. And if it's a seller, then you're right -- it's likely hedged" with stock, Borgato explains.

"I don't agree that big call sale is a positive. Why? Because somebody is making a very large bet the stock's not going to go above that price."

Also, understand that even though there's a buyer and seller on all options transactions, the sellers are often floor traders who are obligated to meet buying demands. So when you say call selling, well, that's almost never a purely positive sign for an option. It's typically neutral, at least if you can guarantee that the trade was initiated by a seller.

You also have to understand the role of market makers. They are the house, and customers are the bettors. Market makers don't buy or sell those big call trades out of love for the stock or because they have an opinion one way or the other. Market makers are just there to do business: Immediately, as they sell options, they will hedge with stock. So, most often, a trader's position is neutral.

Again, Borgato stresses option-to-option volume comparisons, or trade vs. open interest. What's more important with big option trades is

open interest

.

Open interest is the number of contracts already opened, or agreed upon, at a certain strike price. "Those 3,000 Dell calls trade: How much is the open interest? If it's zero, then that means it's a brand new position, and that's worth noting. If open interest is 10,000 contracts, the trade is not as significant as a percentage," Borgato adds.

As a very basic rule of thumb, if the trade is larger than the open interest, it's worth remembering.

There's less to learn from stock volume in the big blue-chip issues. IBM is a difficult case; it's so liquid that it's hard to say which volume is related to options. However, take a stock like

Illinois Tool Works

(ITW) - Get Report

; if there are an extra 100,000 shares traded in a day, it's often related to options.

One more clue: Take note of what price the customer paid for the options. Was it the bid price or the ask price? Or somewhere in between? "The trader on the floor posts a bid and an offer, or 'ask.' If you or I hit that bid, then that shows we were willing to take the price that was posted," Borgato explains.

If a customer really wants to sell, he or she will usually hit the "bid" price. "Then, you can tell this was someone taking a bet about the direction of the stock with these options; if it's a big name firm, that's important too; you might not want to bet against them, or you might want to bet with them," Borgato adds.

Unfortunately, there are very few ways for individual investors to find out what firms are sending orders to the exchanges.