Bloomberg News

Tellabs Options Surge on Renewed Takeover Speculation

January 15, 2008

Tellabs Inc. (TLAB:US) options surged to a record on renewed speculation that the maker of telephone-network equipment will be sold after management is replaced.

Implied volatility (TLAB:US), the key gauge of options prices, rose to a record 176.31 percent and has increased two-and-a-half times since the start of the year. The increase indicates traders anticipate bigger swings in the stock price. Tellabs reports fourth-quarter results in a week, which may also stoke volatility.

``The drivers of the heavy call activity are most likely the company's upcoming earnings report and the rumors circulating that the company is a takeover target,'' said Jocelynn Drake, an equity analyst at Schaeffer's Investment Research in Cincinnati.

Trading in bullish contracts, or calls, outnumbered bearish ones, or puts, by 6.6-to-1. Tellabs shares fell (TLAB:US) 1.6 percent to $6.09 in Nasdaq Stock Market trading.

``We do not discuss market speculation or rumors,'' company spokeswoman Ariana Nikitas said. Tellabs said in November that Chief Executive Officer Krish Prabhu will step down by March 1.

The Naperville, Illinois company may report fourth-quarter profit of 1 cent a share, the average of 14 estimates (TLAB:US) compiled by Bloomberg.

The price of the most-traded contracts, February $7.50 calls, declined 11 percent to 49 cents after climbing as high as 60 cents yesterday. So-called open interest, or the number of existing contracts, increased to 7,123 yesterday from five on Dec. 26.

Two-Thirds

March $10 calls, the third-most active, rose 12 percent to 28 cents after earlier reaching 30 cents. For those bets to pay off, the shares must climb by almost two-thirds from yesterday's closing price before the contracts expire March 21. The stock has remained below $10 since September.

``You have earnings coming up, you have a CEO departing and the stock is at the lowest it's been in long time,'' said Michael McCarty, the options strategist at Meridian Equity Partners Inc. in New York. ``It's likely things could heat up.''

Tellabs shares closed at $5.20 on Jan. 9, the lowest since October 2002.

Tellabs has been previously mentioned as a possible takeover target. Nortel Networks Corp. (NRTLQ:US) and Nokia Siemens Networks were vying for Tellabs, which could fetch $15 a share, Lightreading.com reported in August.

``The rumors have been off and on for months that they're a buyout candidate,'' said Randy Frederick, director of derivatives at Charles Schwab & Co. in Austin, Texas. ``I see a huge amount of uncertainty and the volatility is enormous, probably some of the biggest you'll see anywhere. People are speculating, but they just don't know what's going to happen.''

To contact the reporters on this story: Jeff Kearns in New York at jkearns3@bloomberg.net. Vivek Shankar in San Francisco at vshankar3@bloomberg.net.

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net.


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