Schering-Plough (SGP) Option Action Looks Bullish…..

The
bullish action in Cisco
(
CSCO |
Quote |
Chart |
News |
PowerRating)
, EMC
(
EMC |
Quote |
Chart |
News |
PowerRating)
and Siebel Systems Inc.
(
SEBL |
Quote |
Chart |
News |
PowerRating)

has been overshadowed by the rumors driving Schering-Plough

[SGP|SGP] and the subsequent call
buying. June 40 calls have been the most sought after, with over 7,000 changing
hands in the first three hours of trade. Traders are hearing the takeover price
may be just over $60, but rumored suitor Merck
(
MRK |
Quote |
Chart |
News |
PowerRating)
may have to increase its alleged bid to get the job done.

Here are two ways we may play that potential takeover:

  • Buy
    the June 40 — 45-bull call spread for $1.55. That’s paying $2.25 for the
    40s and selling a like number of 45s for $.70. This spread offers
    fabulous risk vs. reward and gives you a solid month to see if the deal
    gets announced.

  • A
    more conservative play would be to buy the November 40 — 50 bull call
    spread for $3.30. That’s paying $4.60 for the 40s and selling a like
    number of 50s for $1.30. You will not get as fast a tracking of the short-term movement, but you get a lot more time to be right and can virtually
    triple your investment if the deal gets done for a price above $50!

BULLISH $ WEIGHTED CALL vs
PUT

Symbol

Call

Volume

Put

Volume

$W

Call Vol

$W

Put Vol

CSCO

37,487

5,067

101,229

12,810

EMC

8,624

3,390

67,728

12,664

SEBL

9,432

2,417

43,863

10,851

SGP

24,238

9,664

52,201

16,660

Even
the semiannual Lou Gerstner rah-rah session hasn’t been enough to lift Big
Blue
(
IBM |
Quote |
Chart |
News |
PowerRating)
, as traders took profits throughout today’s session. Dollar-weighted put
vs. call ratios aren’t tremendously bearish, but hawkish
comments from a prominent Bear Stearns analyst seem to have encouraged action in
IBM puts.

The semiconductor sector has been up and down all day, but a look at our dollar-weighted scans shows the smart money continues to pour into the put (bearish)
side of that sector.

BEARISH $ WEIGHTED PUT vs
CALL

Symbol

Call

Volume

Put

Volume

$W

Call Vol

$W

Put Vol

SOX

351

2,560

5,786

54,026

IBM

12,390

17,157

37,872

81,559

One
of the most bizarre events of the day was the announcement by
World
Wrestling Federation Entertainment

(
WWF |
Quote |
Chart |
News |
PowerRating)
and NBC

(
GE |
Quote |
Chart |
News |
PowerRating)
that they are discontinuing their professional football league, the
XFL.

For
a man known for his bravado and outrageous promotion, the XFL seemed the perfect
vehicle for WWF Chairman Vince McMahon. The challenge of taking on the NFL and
that old boys’ club was seemingly a role Mr. McMahon was born to play.
Unfortunately, the WWF head honcho and Dick Ebersol of NBC were shown to be more
like the wrestlers the WWF promotes, more bluster than daring do.

If either Mr. Ebersol or Mr. McMahon thought they would lose less than the $35
million they’ve told us they lost to build a competitor to the
multibillion-dollar NFL you really had to wonder what they were smoking. I mean
GE flushed between $400 and $500 million on their internet portal, NBCI, so it
is almost unimaginable that they would pull the plug on the XFL with losses that
were less than the interest on the money they lost on NBCI.

Now, I suppose we could look at the dismissal of the XFL in one of two
ways;

  1. Two
    veteran managers were extremely disciplined and cut their losses rather than
    letting them run. This would follow my second rule of making money in the
    stock market; You can’t eat like a bird and *$#@ like an elephant!

  2. Or
    Messrs. Ebersol and McMahon had no business getting into the XFL if they
    thought they could build a billion-dollar business in a single season.

I
hope you all have a great weekend and be sure to check out our show, “Doctor J
& the Traders” on www.webfn.com,
looping throughout the weekend!

(1010WallStreet.com
has licensed the use of Hamzei Analytics proprietary options analytics)