Is Redback Ready To Make A Comeback?

  • November 15, 2000
  • Jon Najarian

Option
volatility continues to contract as the Florida re-count’s suspension and
resumption have had little negative impact on market sentiment. As we get closer
to closure on the presidential election, we see more stability coming back and
thus, lower risk premium being demanded.

The VIX has slipped to 29% (as of 10:45 CST) vs. the high of 36%, which means
an at-the-money call or put on the OEX
(
OEX |
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the 36% level to just 7 3/8 at the 29% level. That
(
QQQ |
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earlier this week (traders were buying the QQQ at the
year low of 69 and selling the December 69 call for 5 7/8 on November 13th),

has come in
significantly. The QQQ has rallied to 77 1/8, while the December 69 calls are
now trading 10 1/2. That means there is a gain of 8 1/8 on the QQQ and a
corresponding loss of 4 5/8 on the 69 calls, for a net of 3 1/2 to the good. A
good portion of the gain has come from the compression of QQQ volatility as the
Nasdaq has staged an impressive rally.

Today’s most active option classes include
(
QCOM |
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PowerRating),
(
MSFT |
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(
EMC |
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PowerRating). However,
what’s peaking our interest is the action in Redback Networks
(
RBAK |
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PowerRating).
The average daily volume in RBAK over the past month has been just 2100
contracts, but yesterday the volume spiked to 6100 contracts. During that same
period, the volatility ran from 86% to 145% yesterday. Part of the reason for
this surge was concern over restatement of financial information, but Price
Waterhouse Coopers said everything is OK. Additionally, the CFO resigned, but
analysts seem to think this was not tied to performance or outlook, but strictly
personal reasons. RBAK shares still trade at a significant discount to their
peers in next generation IP, such as
(
JNPR |
Quote |
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News |
PowerRating).

Some
traders are looking at the January 90-105 bull-call spread as a way to play for a rebound in RBAK
shares. The Jan 90’s are trading for $15, while the Jan 105’s are trading
for $10. If they paid $5 with 1/4 discretion, they would be getting a potential
3-to-1 risk-vs.-reward for owning one of the premier advanced networking
companies.