Telecom Takeovers Keep Options Pros Hopping - TheStreet

Telecom Takeovers Keep Options Pros Hopping

Qwest and Global Crossing chatter makes a splash in the crowds.
Author:
Publish date:

Don't put all your option eggs into one telecommunications takeover story basket.

Recently, both

Qwest

(QWST)

and

Global Crossing

(GBLX)

have been rumored to be the next takeover target of

BellSouth

(BLS)

(which was dissed in a bid for

Sprint

(FON)

). So, not surprisingly, speculative option investors have been doubling down with their bets on Qwest and Global Crossing -- buying November calls in both stocks.

"We'd rather not play rumors, but it does make sense not to bet everything on one," said Kevin Murphy, option retail strategist with

Salomon Smith Barney

in New York City.

November 40 calls in Qwest were fetching 1 3/4 ($175), up 9/16 ($56.25), and the stock was up 3/4 to 35 11/16. November 40 calls in Global Crossing today gained 3/4 ($75) to 2 ($200), while the stock was up 2 3/8 to 34 5/8.

Away from individual names, Murphy said Solly's proprietary put/call ratio has been "giving off very bullish readings. There was a lot of put-buying recently going into the

Fed

meeting, and so from a contrarian standpoint, that bearish sentiment is very good."

The market's fear gauge read similarly Friday: The

Chicago Board Options Exchange's Volatility Index

, or VIX, slid precipitously down 7.27% to 23.07.

Scott Barker, portfolio manager with

Analytic Investors

, said his firm has wriggled out of too-tight individual stock options and into more comfortably fitting index options. "It's just prevention of event-risk. With so many potential bombshells out there lately from companies, we're willing to give up some premium for peace of mind," Barker said.

"We've done and are doing some short put positions in a lot of indexes -- the

Nasdaq 100

, or QQQ, the

S&P 100

, or OEX, and some biotech index options -- some of the sectors with more overpriced options," he explained. Barker and the option strategy team have a model that breaks down option opportunities by sector. "We've done well on almost every one, except when we were short gold," he laughed. "We're still not convinced not to short gold."

For example, Barker's firm in September sold QQQ October 121 puts, on the expectation that the stock market index would rise. "We thought they were overvalued, mispriced, and that's the kind of strategy that drives out proprietary trading," he said. The Nasdaq has rallied this month, and the puts are set to expire next week. Currently, October 121 puts trade at 3/4 ($75); the index is down 1/4 to 125 15/16.

Barker

et al

are also bearish on banks, transports, utilities and oil; they are still short gold calls. (In other words, they sold call options on gold stocks because they believe the price of gold will not rise again, and therefore the call options are likely to expire worthless. In essence, that means their investment opinion is still "short" gold.)