Xircom Call-Options Buyers Ran Ahead of Intel Deal

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Updated from 12:56 a.m. EST

Oh, to be one of those fortunate investors who made a rare foray to purchase call options on

Xircom

(XIRC)

Friday, the last trading day before

Intel's

(INTC) - Get Report

announcement Monday that it was buying Xircom for $25 a share.

Options action in Xircom was robust Friday and the price of its call options popped, according to reports from some options-market analysts, foreshadowing Monday's acquisition announcement.

Volume in Xircom options totaled 3,791 on Friday, 3,648 of which were call options, according to

McMillan Analysis

. Those numbers far surpassed Xircom's average daily options volume of 595 contracts, according to McMillan.

A call option gives the purchaser the right but not the obligation to buy a stock for a certain price by a specific time. Investors buying call options reflect a bullish bet on the underlying security. When the underlying security rallies, the price of the call option increases. Radical changes in call-option volume and prices on a stock often come ahead of takeover announcements, making the market a strong indicator for M&A investors.

Xircom, based in Thousand Oaks, Calif., makes products used to connect mobile computing devices to corporate networks and the Internet. Xircom closed at $18.06 Friday, up a hair from a close on Thursday of $18. Shares of Xircom were soaring $6.50, or 36%, to $24.56, on Tuesday.

Traders on Friday mostly went after the Jan. 20 calls on Xircom, sending volume to more than 1,200 contracts as the price rose to 1 ($100). About 500 of the Jan. 17 1/2 calls traded Friday. Those calls were trading up 5 ($500) to 7 1/8 ($712.50) Tuesday on volume of 400 on the

Chicago Board Options Exchange

.

With the market taking a holiday Monday when the deal was announced, Tuesday morning's action pushed those January calls, which were out of the money on Friday, quickly into in-the-money territory this morning. The calls were trading up 3 1/2 ($350) to 4 1/2 ($450) on the

Pacific Exchange

, no doubt bringing wide grins to Friday's call buyers. Before Friday's trading, there was no open interest (meaning no one had opened a position in that option) in the Xircom Jan. 20 calls.

A cynic might label Friday's trading in Xircom options fishy. A CBOE spokeswoman said that the exchange's market regulation department has initiated a routine investigation of the trading in Xircom options ahead of the acquisition announcement.

A CBOE floor source said the volume in the options was heavy Tuesday, and said there were no irregularities in Friday's trading on Xircom. The takeover is expected to be completed in the first quarter, according to the announcement.

With the price of Xircom trading close to its takeover price, it indicates that arbitragers are expecting the deal to go through. The spread between where Xircom is currently trading and the takeover price, also known as the spread, is rather tight, considering Xircom is trading at $24.56, close to the acquisition price of $25.

Meanwhile, Intel was down on the news of the Xircom purchase and ahead of its fourth-quarter earnings report expected after the close. Shares of Intel fell 69 cents to $31.44. The 24-analyst

First Call/Thomson Financial

consensus estimate calls for the semiconductor giant to post earnings of 37 cents a share. In the year-ago period, Intel earned 35 cents a share. The 13-analyst First Call estimate calls for Intel's revenue for the fourth quarter to come in at $8.747 billion.

Options action in pet food giant

Ralston Purina

(RAL)

was heavy Tuesday on news that Swiss food giant

Nestle

was purchasing it for $33.50 a share in cash, or $10 billion. The acquisition price represents a 36% premium over Ralston's closing price on Friday of $24.63.

Shares of Ralston hopped $6.88, or 27.9%, to $31.50.

The deal is expected to be completed by the end of the year at the latest, the companies said.

The June 30 calls have seen a hefty amount of trading on the CBOE, with more than 5,100 contracts trading, compared to open interest of 39 contracts. The June 30 calls were up 1 15/16 ($193.75) to 2 7/8 ($287.50).

One name that doesn't pop up much on the most active options list,

Allaire

(ALLR)

, an Internet software company, was certainly up there Tuesday as 44,000 of the February 7 1/2 calls traded at the CBOE.

Open interest in the options, which were trading up 3/16 ($18.75) at 1 1/8 ($112.50) at midday, stood at 110 contracts as of Friday's close, indicating that the trade this morning was a fresh position. Shares of Allaire were up 28 cents to $7.78.