Expirations Loom as Traders Ponder Witch Way Is Up

Triple-witching always makes for an interesting summer Friday.
Author:
Publish date:

The May inflation report,

Greenspan

-- these things are behind us. Now all that remains is the triple-witch.

Triple-witching Friday, the quarterly expiration of stock and index options and index futures, can cause tremendous volatility. Every time it comes around, there's a tremendous flurry of activity on Wall Street as derivatives experts and quants try to figure out which way it's pointing. They're right about half the time. It ain't for nothing that a lot of people sit out the session.

In truth, the good moves that stocks put on over the past couple of days probably had a good deal to do with the expiration. There was, going into this week, a tremendous amount of near-the-money open interest in the June

S&P 500

calls. As stocks moved higher after the

Consumer Price Index

came out Wednesday, calls that didn't cost that much the day before came into the money. As market makers moved to cover, this sent stocks up higher still.

This kind of action looks like it may continue today. The market looks strong on the open. At 9 a.m. EDT, the September

S&P 500

futures were unchanged, more than 2 above fair value, to 1353.5. That puts them near 1354, a point futures traders pointed to as a key resistance level. The next stop on the chart is the May 20 high of 1368. If the futures reached that point, it would drag the cash index above 1350 -- where there is a huge tranche of calls.

But some expect that, triple-witching or not, after two days of big gains, stocks will trade a bit more leisurely. "I think it will be an up day," said Doug Myers, vice president of equity trading at

Wachovia Securities

, "but not by a huge amount. We're just getting back into the trend."

The bond market was hanging flat after yesterday's big move, with the 30-year Treasury up 1/32 to 90 4/32. That leaves the yield at 5.96%.

The euro spiked against the dollar and yen as rumors ran rife that the

European Central Bank

intervened against both currencies. The ECB later confirmed that it intervened against the yen on behalf of the

Bank of Japan

. BOJ and

Federal Reserve

officials would not say if they had taken part in the intervention. There were lately rumors in the currency market that a second round of intervention was under way.

The move had the scent of the

G7

in it. Japanese officials worry that a too-strong yen could snuff their burgeoning recovery, and other central bankers apparently share that concern. The dollar was trading at 120.1 yen, up 0.91.

Japanese stocks started the day well, but a morning rally ran into investors anxious to take profits after a strong run. Up more than 150 early on, the

Nikkei

finished down 39.19 to 17,431.26.

Hong Kong markets were closed.

European indices were trading well, boosted by Greenspan's comments yesterday and getting expiry boosts of their own. In Frankfurt, the

Dax

was up 56.08, or 1%, to 5468.08. In Paris, the

CAC

was up 14.18 to 4522.95. And in London, the

FTSE

was up 76.5, or 1.2%, to 6570.1.

Friday's Wake-Up Watchlist

By

Brian Louis

Staff Reporter

  • Frontier (FRO) - Get Report decided to take no action on the hostile bid from Qwest (QWST) and reaffirmed its plan to be taken over by Global Crossing (GBLX) . On Sunday, Qwest offered to acquire Baby Bell U S West (USW) and Frontier in separate transactions. Meanwhile, U S West said it hasn't made a determination whether or not Qwest's bid constitutes a "superior proposal" to Global Crossing's. Global Crossing and U S West in May agreed to merge.
  • Morgan Stanley Dean Witter downgraded Intel (INTC) - Get Report to outperform from strong buy, CNBC reported. Yesterday, Credit Suisse First Boston cut its per-share earnings estimates on Intel to $2.25 from $2.32 for fiscal 1999 and to $2.55 from $2.65 for fiscal 2000. The firm kept its 12-month price target of 75. In other news (earnings estimates are from First Call):
  • Adobe Systems (ADBE) - Get Report reported second-quarter earnings of 70 cents a share, beating the 11-analyst projection by a nickel and moving ahead of the year-ago 41 cents.
  • Danka Business Systems (DANKY) of Britain sold its facsimile division, Omnifax, to Xerox (XRX) - Get Report for $45 million in cash.
  • Gillette (G) - Get Report said it expects to report about a 20% decrease in second-quarter earnings compared with a year ago. The 14-analyst estimate called for quarterly earnings of 29 cents a share vs. the year-ago 33 cents. Gillette said it sees quarterly sales increasing by a low-single-digit percentage, and blamed the warning on disappointing sales of its Braun, stationery and toiletries products.
  • Iomega (IOM) is going to take a restructuring charge in the second quarter of 11 cents a share. Excluding the charge, the company forecast a loss in the second quarter in the range of 5 cents to 10 cents a share. The four-analyst outlook called for break-even results.
  • Morgan Stanley upgraded Lam Research (LRCX) - Get Report to strong buy from outperform.
  • Lucent (LU) is close to a deal to acquire privately held Nexabit Networks, a maker of high-speed Internet switches, for between $600 million and $800 million, The New York Times reported, citing executives close to the talks. The Times, citing the execs, reported that the talks could still fall apart but that the firms appear set for an announcement shortly after Lucent completes its $20 billion acquisition of Ascend Communications (ASND) - Get Report next week.
  • Oakwood Homes (OH) warned fiscal third-quarter earnings could be as much as 50% lower than the seven-analyst analyst estimate of 55 cents a share. Oakwood also said its board will be looking into "strategic alternatives," including a merger or sale of the company. In addition, Oakwood's management is pursuing the possibility of a management-led buyout, the board stated.
  • Goldman Sachs yesterday priced Viant's (VIAN) 3 million-share IPO top-range at $16 a share. The price range for the Internet services company's offering was raised to $14 to $16 from $10 to $12.
  • This week's Inside Wall Street column in Business Week, penned by Gene Marcial, reports that rumors are swirling that Kmart (KM) is being eyed as an acquisition target by some big grocers, notably Safeway (SWY) and Kroger (KR) - Get Report. Kroger recently bought Fred Meyer, so it might not have much desire for another big buyout, but Safeway could be more interested, the column says. Elsewhere, Mike Kicera, president of MRK Capital Management, says a management group appears to be moving toward taking Rural/Metro (RURL) private and some investors specializing in leveraged buyouts have in addition expressed interest in the company, the column reports. The column also offers up a bullish piece on Rare Medium (RRRR) .