Financial Firms' Options Belie Takeover Frenzy

While the stocks of brokerage houses continue to fly on takeover speculation, the options on the stocks aren't quite as frothy, according to some options market analysts.

Volatility Index
Close Today	% Change
19.28	-1.58
Source: ILX

Continued takeover speculation fueled the shares of J.P. Morgan (JPM Quote - Cramer on JPM - Stock Picks), Lehman Brothers (LEH Quote - Cramer on LEH - Stock Picks) and Bear Stearns (BSC Quote - Cramer on BSC - Stock Picks), three of the financial sector's prime takeover candidates.

Put/Call Ratio
Close Today	Previous Close
0.37	0.44
Source: ILX

J.P. Morgan was up $13.13, or 8.6%, to $165, but off an intraday all-time high of $167.50; Lehman also ran up to an intraday high of 149.25, and came back in a bit to145.06, up $4.25, or 3%, at midday, while Bear Stearns was up $3.63, or 5.6%, to $68.88. Bear also bounced off an all-time intraday peak of $69.75.

Still, options traders watch for unusually high volume and dramatic price increases in a company's call options to determine the level of speculation.

Paul Foster of 1010WallStreet.com in Chicago, said the activity in the options on some of the brokerage firms that have been subject to buyout talk isn't indicating anything to him right now. He said the implied volatility -- one measure of speculation fever that's reflected in rising options prices -- on the options hasn't jumped and the trading volume in the options isn't indicating anything significant. He also said professionals weren't playing the options on some of the firms.

Foster said the implied volatility on J.P. Morgan options was mostly unchanged from where it was Tuesday and Wednesday. For the September 160 calls, implied volatility was at 38, while for the puts it was at 40. Foster said he has offers in to short the stocks of J.P. Morgan and Lehman.

Implied volatility is the annualized measure of how much the market thinks a stock or index can potentially move and is a critical factor in an option's price.

On the American Stock Exchange, 40 of the September 690 puts on the Amex Broker/Dealer Index changed hands at 16 1/8 ($1,612.50), showing fresh interest in the contract. On Thursday, the index was up 13.88, or 2%, to 684.87.

That action could have come from an investor selling the puts on the expectation that the brokerage sector will continue to rise, leaving the options to expire out-of-the-money. The investor would keep the premium collected for selling the puts.

Or, the investor could be buying the puts as protection against a sizable stock position in the brokerage sector.

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Datek Online will soon roll out options trading to clients.

In an email sent to "Datek Online's most valued clients," in mid-August, some of the firm's customers "have been selected to get the first preview of our new, long-awaited options trading service."

Datek spokesman Michael Dunn said the service will be "rolled out in waves." The note to clients, dated Aug. 17, said the service is tentatively slated to be available to "select" customers within the next four to six weeks.

Not offering options trading to clients was seen as a major shortcoming of Datek, one of the industry's leading online brokers. Datek competitors such as Schwab (SCH Quote - Cramer on SCH - Stock Picks), E*Trade (EGRP Quote - Cramer on EGRP - Stock Picks) and Ameritrade (AMTD Quote - Cramer on AMTD - Stock Picks) see options trading as a significant part of their businesses.

The email said that if customers sign up and are approved, they will pay $9.99 per options trade plus $1.75 per contract. The online brokerage, which hasn't previously offered options trading to clients, said that initially, customers will only be able to buy calls and puts while other strategies will required approval for specific clients.

Elsewhere in the world of online options trading, Mr. Stock, an online brokerage which specializes in options, this week said it lowered its commissions on options trades to a new minimum of $15.50 ($14 plus $1.50 per contract) from $17.75. The firm also cut its stock trading commissions to $9.95 (market orders over 5,000 and filled at $5 or higher, plus .125 cents per excess share) from $14.95 previously.