Options traders, expecting

Microsoft

(MSFT) - Get Report

to settle with the Feds during the next few days, are playing for a big move on that news.

And they were expressing that anticipation with heavy call buying today, and an especially active route in speculative out-of-the-money options, New York traders said. Microsoft's stock has been weighed down by the antitrust case brought against it by the

Justice Department

.

Rumors, however, are pointing to an impending settlement, an event money managers think will unshackle the stock.

"We have had decent call buying in Microsoft today, mostly because people see a whole lot more upside," said a trader on an institutional options desk. "They're going for the 145 calls because they think when it breaks, it breaks big." That would have to be a heckuva break, with Mister Softee down 1 5/16 to 110 9/16 in early afternoon trading. But the demand for the out-of-the-money calls -- those with strike prices higher than the current share price -- was showing up in their prices.

The Microsoft April 145 calls were trading for as high as 11/16 ($68.75). While that doesn't sound like much money, consider the fact that it is about 33 points out-of-the-money and expires on April 20.

Friday is also a key day for speculators to cover themselves for a weekend announcement. That speculation will make some options prices unnaturally high, something that could be turning up in Microsoft's out-of-the-money action today.

Also active were the April 120 calls, trading more than 4000 contracts for around 4 ($400) and the 130s, which traded more than 5400 contracts and rose 1/4 ($25) to 1 1/2 ($150) by midday.

Retail investors didn't seem to be showing the same enthusiasm, said a trader on a retail options desk. "The stock is always active here, so nobody's saying, 'I've got to own it because of the settlement rumors,'" he noted.

The

Chicago Board Options Exchange's

TST Recommends

volatility index was rising for the second consecutive strong day in the overall market.

The VIX rises when

S&P 100

index put buying increases. The fact that it's rising against a generally strong equity market, though, may pose some problems for those trying to hedge.

"On days like this, I like to look for cheap puts, but with the VIX rising, it tells me that insurance has become expensive," says Tom Burnett, a trading adviser at discount brokerage

Wall St. Acccess

. "You wouldn't pay $20,000 to insure a $100,000 house because the chance of a fire isn't one-in-five."

Don't say we don't try to help. Yesterday, as

Applied Materials

(AMAT) - Get Report

stock was falling 2 5/16 to 102 7/16, there was one major

institution buying up out-of-the-money calls.

This morning,

Warburg Dillon Read

analyst Byron Walker raised his earnings estimate for the company and the stock rocketed 7 3/8 to 109 13/16 by midday.

Yesterday, those active April 105 calls were trading at 9 1/8 ($912.50) Thursday. By Friday, they were selling for 12 1/2 (1250), a tidy 3 1/2 ($350) one-day take.