Schaeffer's Midday Options Update Features Red Hat, Microsoft, E*TRADE Financial, Research in Motion, and First Data.

CINCINNATI -- Today's Schaeffer's Midday Options Update features Red Hat (NASDAQ:RHAT), Microsoft (NASDAQ:MSFT), E*TRADE Financial (NYSE:ET), Research in Motion (NASDAQ:RIMM), and First Data (NYSE:FDC). The Midday Options Update contains a brief commentary on the day's most notable activity and a table listing the most-active calls and puts for the day.

Options Update: Options Update: Trading Data on First Data

Raising the Hat

Red Hat (NASDAQ:RHAT) made the news today after it reported second-quarter earnings that beat street expectations. The shares were up 24 percent when I took a look, trading near a new annual high. The firm raised fiscal 2006 guidance, and now sees third-quarter earnings of nine to 10 cents per share, versus the consensus estimate of eight cents. Two analysts upgraded the shares this morning. UBS raised its rating on the stock to "buy" from "neutral," and Suntrust raised its rating to "buy" from "hold."

RHAT sells a popular version of the Linux operating system, originally developed by Finnish student Linus Torvalds. Linux is open-source software. Whereas firms such as Microsoft (NASDAQ:MSFT) closely guard their source code, anyone can grab a copy of Linux for free, and they can make changes too. Torvalds still coordinates the whole project, and holds the surprising title of Benevolent Dictator for Life at the Open Source Development Labs in Oregon.

Something New to Phone Home About

E*TRADE Financial (NYSE:ET) has agreed to acquire the BrownCo online brokerage service from J.P. Morgan Chase or $1.6 billion. ET estimates that the acquisition will increase full-year earnings by seven cents per share. Once the deal closes, ET will have nearly 4.3 million customer accounts, with approximately $160 billion in customer assets. Total customer cash and deposits, the company says, will be $27 billion, and the enlarged ET will enjoy approximately 160,000 daily average revenue trades.

Growing Blackberries

Shares of Research in Motion (NASDAQ:RIMM) gapped sharply down this morning after the maker of the BlackBerry reported in line second-quarter results, but confessed that subscriber growth of 620,000 came in at the bottom end of its guidance range. The Street is worried that the growth rate might be slowing. Nevertheless, Banc of American reiterated RIMM at a cautious "neutral," while Piper Jaffray edged its price target on RIMM up by one dollar to $78.

Most-Active Options Update

At 2:19 p.m. eastern time, the Dow Jones Industrial Average (DJIA - 10,525.6) has added 0.51 percent. The S&P 500 Index (SPX - 1,225.38) is up 0.70 percent, and the Nasdaq Composite (COMP - 2,115.3) is up 0.94 percent. At 2:19 p.m. Eastern time, 2,247,351 calls have changed hands compared to 1,611,912 puts, equaling a single-day put/call volume ratio of 0.71. The CBOE's equity put/call volume ratio weighed in at 0.61.

First Data

Have you seen those Sudoku puzzles in the newspapers? They're a little like crossword puzzles, but with numbers instead of letters. It takes about a minute to learn the rules, but weeks to get any good, and the challenge, at least in my household, has become addictive. Today, First Data (NYSE:FDC) presents a puzzle at least as difficult as any Sudoku.

The company describes itself as "the world leader in electronic commerce and payment systems." Whether you want to wire money, or pay for dinner, FDC has solutions, and its "flagship subsidiary Western Union Financial Services, Inc. pioneered the first electronic money transfer in 1871 ..."

The stock's October 32.50 put (FDC VZ), which began the day with no open interest at all, had seen a volume of 12,450 contracts cross the tape by the time we grabbed our figures. The stock went ex-dividend today, but I don't think that has anything to do today's option action.

The games began at 11:29 a.m. Eastern time this morning, when a block crossed on the CBOE at a nickel. With the bid price listed at 0.00 and the ask at 0.10, its hard to know for sure whether these contracts were bought or sold until the implied volatility figures come out tomorrow. But for the next 35 minutes, a succession of deals went through, suggesting that an institution was behind the trading.

The stock price was 40.23 at last check, so the October 32.50 put is deep out-of-the-money. Whoever wrote the contracts stands to make money as long as the stock does not fall far below 32.50 before October options expire on October 22. But how much?

Priced at a nickel, each contract was worth five dollars (a nickel multiplied by one hundred, the number of shares each contract represents). That means 12,450 contracts sold for just $62,250. This is small change for an institution.

The stock has had some ups and downs this year, and has not made any clear advance. It recently showed disrespect for its 80-day moving average, but investors seem reluctant to push it below the more powerful 160-day moving average, which, with additional support from the 40 level, is propping up the price.

There is no major news on the stock. Yesterday the company reported that one director, of 13 years standing, has resigned, and a new man was unanimously signed on.

The stock's Schaeffer's put/call open interest ratio has dropped to 0.39, which is lower than 94 percent of readings taken during the past 52 weeks, putting it close to an optimistic extreme. However, FDC is usually not very active in the options pits, so this SOIR is based on only small open interest, leaving aside today's large blip on the radar, so I would not consider the SOIR as the strongest indicator today.

Short interest is nearly 10 million shares, and fell by more than 14 percent in September. At current average trading volumes it would take a little more than four days to cover all these bearish positions. We monitor short interest because sometimes sudden good news comes along and pushes a stock's price up sharply. This might shake out some of the short sellers, who suddenly see that it will cost more money to buy their stocks back than they tucked under the mattress when they originally sold the positions. If these turncoat short sellers suddenly transform into buyers, they can push the stock price yet higher and perhaps provoke further short covering.

Wall Street has an intriguing view of FDC. From Zacks I see that 27 analysts rate the stock, and they do not all seem to agree:

* 11 "strong buys"

* 4 "buy"

* 11 "holds"

* 1 "sell"

* 0 "strong sells"

This configuration leaves room for downgrades, and the supposedly rare "strong buy" rating isn't rare at all for FDC. But there are is a great deal of skepticism, with 12 brokerages keeping FDC at a cautious "hold" or worse.

I notice that the stock is trading in small volumes today. About 1.7 million shares had found new homes when I checked today, compared to 5.2 million on September 22.

FDC earns itself a Schaeffer's Equity Scorecard reading of 3.5 out of 10 suggesting that the path of least resistance still lies to the downside.

Click on the following link to access a Daily Chart of FDC since January 2005 with 80-day and 160-day moving averages: http://www.schaeffersresearch.com/wire?ID=14246 .

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About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method .