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Helping Out the Lunatics

Some are critical of the CBOE's new rule allowing margin to be extended to options investors. Plus, thoughts on Andrx.
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SAN FRANCISCO -- Skyrocketing Internet IPOs. Mechanics cum daytraders. Market-obsessed grandmothers. Companies with $10 million in revenue getting bought out for $6.9 billion in


(CSCO) - Get Free Report


To the long list of reasons why


people say the stock market is a house of excess filled with bubble machines, add the fact that margin has been extended to folks invested in options.

As of Monday,

Chicago Board Options Exchange's

member firms may lend up to 25% of the current market value of a listed option that has more than nine months to expiration. Margin requirements will be 75% initially and 75% maintenance, according to the exchange's

announcement, but will be lower for investors using options as part of a hedging strategy, such as collars or protective puts.

"Now they want to make it easier for lunatics that are speculating and speculating with wasting assets?" said one incredulous market strategist when told of the news. "Why not? Let 'em borrow so they can leverage up the leverage. It's pretty crazy."

But hold the rhetoric for a second (I prefer my toast dry, anyway).

Some observers note the margin applies to Long-term Equity Anticipation Securities, or LEAPS, which mature as far out (man!) as 30 months from time of issuance and whose movements are generally more like those of stocks than of options.

Meanwhile, supporters of the plan (surprise!) see nothing wrong with extending margin on LEAPS.

"The industry has been working on this for years to expand" the use of borrowing on margin for some options, said Stewart Winner, head of retail options for

Prudential Securities

in New York and a member of the CBOE's committee on options proposals. (COOPS?) "Now investors can borrow up to 25% of the value of some LEAPS. That's adding more leverage and reducing the requirements, and that has always historically led to an increase in options volume."

Which, of course, is good for Winner and his ilk.

And Furthermore

Diane Garnick, equity derivatives strategist at

Merrill Lynch

said margin on options is going to be "big" and offered the following recommendation:

"Investors holding

S&P 100 Index

options, which are American and can be exercised at any time, may want to consider buying long-dated options," Garnick said via email. "An investor holding a one-year OEX option could borrow 25% of the options market value until the option has nine months or less left until expiration. Once the option has lost the 'borrowability' feature, investors in American options can liquidate their holdings and purchase new options with greater than nine months left until" they expire.

These investors will then tell two friends about the trade, and they'll tell two friends. And so on and so on ...

Meanwhile, Garnick -- who once described herself as a

math nerd in this space -- has since requested a new moniker: "Duchess of the Derivative."

So let it be written, so let it be done.

TSC Special

Staff reporter Beth Kwon gets the nod for

SI's Message Board Purge Spurns the Site's Star Power.

Oh Yeah

Before I got sidetracked by the issue of how

IDEC Pharmaceuticals


moved ahead of

Merrill Lynch's


yesterday, I was talking with Evan Sturza of

Sturza's Medical Research





Sturza is "bullish" on Andrx and has been recommending the stock since at least

June 15, 1998. But he was "troubled" by some comments made by hedge fund managers about the company's prospects

last week.

The health care researcher and hedge fund manager was particularly taken aback by remarks downplaying the potential competition Andrx will face in the generic market for

Cardizem CD

. Because Andrx was the first company to file for approval with the


, it got a six-month window to market its generic version,

Cartia XT


But that period ends in January. "Once that happens, everyone and their brother" will offer competing versions, Sturza said.


managers Clarke Adams and Mark Lapolla acknowledged potential competition from Australia's

FH Faulding




last week, but offered reasons they believe the threat is limited.

But "it's a mistake to assume there aren't other companies who have or are going to file" for approval, Sturza said.

Once the competition begins in earnest in January, Andrx's market share will erode, Sturza predicts. "It's good to be first," and the company could grab as much as 50% market share, he said. But the company will struggle to hold on to 20% of the market as competitors arrive next year.

Morever, competition will likely lead to falling prices, meaning Andrx will have a "difficult time" growing "total revenues," he continued. Still, all parties agree Cardizem CD is a tough drug to replicate.

Nonetheless, Sturza called Adams' prediction that Cartia XT could boost Andrx's earnings per share by $3.92 next year "outrageous," even though the original forecast was a "theoretical" one.

Yet Sturza is far from negative. He forecasts Andrx will handily beat the

First Call

six-analyst consensus estimate of $1.49 this year (raised since our initial report, BTW) and $1.24 in 2000, forecasting earnings of $1.66 and $2.01, respectively.

Bottom line? "It's getting late in the story," Sturza said. "It doesn't mean they don't have a good long-term future but you're never going to get the type of explosive move you just had."

Nonetheless, Sturza isn't recommending investors sell.

Reached today, Adams and Lapolla stood by their man, err ... call, reiterating the difficult time they expect Andrx's competitors will have in the Cardizem market and the favorable prospects for the company's generic version of


, which they expect to hit the market as early as the beginning of next year.

"I think they'll blow them away," Adams said about both Andrx's earnings estimates and its doubters.

Time, of course, will tell who's right, who's wrong and who's zooming who. Moreover, while this may smack of Thursday morning bioteching, it's also an instructive lesson about taking everything you read with a grain of salt (and a shot of tequila if you like). And a reminder, of course, to

do your own homework


Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at