Sun Microsystems

(SUNW) - Get Report

is a fine company and its No. 2 executive, President Ed Zander, was spawned from the same hardscrabble Brooklyn streets that gave the world Herb Greenberg. Nevertheless, its shares are off more than 60% in the past 12 months.

With that in mind, I'll spare you the hackneyed "Sun rising" stuff and simply say that options activity in Sun might add a strange twist to the shares of the erstwhile Silicon Valley money machine.

Now, it's always a little dangerous to play options on a stock that's already had a nice move or has positive sentiment building behind it. Often the movement or the emotion is already priced into the option. Sun isn't in that category, at least not yet, although a bit of an optimistic groundswell seems to be under it.

Lasting Love or Quick Fling?

Over the past 10 trading days, Sun shares are up roughly 10% to $14.57 as of Wednesday's close, a slightly higher percentage jump than the

Nasdaq Composite

. But institutional investors' demand to buy Sun call options has been so strident that, according to one Chicago Board Options Exchange trader, market makers are "short a boatload of calls." Being short calls means those options have been sold, and the seller is now obliged to deliver shares at a price -- in this case $15.

Sun Stays Strong
It's seen a solid rise over the past 10 days

That could mean Sun shareholders will find a little love as the Dec. 21 options expiration approaches. (OK, they may find something closer to a tawdry two-week fling in Barbados, but it'll feel like love until then. That counts for something, doesn't it?) And much like the aftermath of a quick fling, they might come away feeling pretty empty.

"If it's moving through 15 before expiration, you'll see some movement," says Alan Goldstein of Rubicon Investments, a CBOE market maker. "For the past couple of weeks, there have been buyers of Sun options. It's been cheap. It's still cheap."

What Could Happen Next

How will that action shake out in the next two weeks before the expiration? It's pretty basic: up and down. Sun heads up if there's enough fundamental belief in it to keep buyers coming and driving the price up. Once it appears the stock will land above $15, market makers have to buy shares as well to hedge or cover their short options positions. In fact, even the current wave of call-buying has made the pros chase these shares a bit. That pressure provides the impetus for more appreciation.

If Sun doesn't have enough gas to crack $15, though, Goldstein notes that market makers can begin unwinding their hedges by buying the options contracts back and selling their shares, putting more downward pressure on the stock and the options premium. These kinds of machinations fall under the category of pinning, a term used to describe a stock that lands right at or just short of a strike price at expiration and gets options sellers off the hook.

At Wednesday's close, though, Sun shares were up 6% and creeping steadily toward $15.

The call-buying continued as well, pushing the open interest in options with a $15 strike price to somewhat remarkable levels, even for an active stock like Sun. In December options, open interest on the 15 call stands at 53,000 shares; the open interest in the January 15 call contract is more than 104,000. That's some serious size. While investors likely are selling calls to offset being long Sun shares, buyers have apparently been generating enough of that action to concern market makers.

The buying continued Wednesday, as more than 5,300 of the December 15 calls and 5,000 of the January 15 calls changed hands.

The pros don't want to spend expiration day paying $15.25 or $15.50 for shares they're locked in to sell at $15. In addition, they'll try to price the calls higher to keep more buyers from storming the gates.

"When market makers are long the strike, you have a better chance of a stock getting pinned," Goldstein says. "If they're short, it's not as likely to pin."

That's not to say, though, that investors should snap up Sun calls or shares to play for an expiration-related rally. Leave that to the pros. But if you like Sun for the long term, you may be able to grab it here and also get some short-term pleasure in the mix. These days, that certainly counts for something.

Dan Colarusso is a New York-based financial writer. His recent work has appeared in The New York Times, Barron's, Institutional Investor and Investment Dealers' Digest. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Colarusso welcomes

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