Net Options Flying on Rocky Day

As the Net stocks get hammered, traders look to puts.
Author:
Publish date:

Among Internet options players, the fear is back.

At least some Internet service providers saw their shares get clocked Thursday after a less-than-stellar earnings report from

Infoseek

(SEEK)

, the Sunnyvale, Calif., Internet company, which co-owns the

Go Network

Web portal with

Walt Disney

(DIS) - Get Report

.

TheStreet.com Internet Sector Index

, a weighted measure of 20 Net players, was off 7% at 644.98.

Kevin Murphy,

Salomon Smith Barney's

options strategist, pointed to the firm's internal put/call ratio, which records only new positions, as being "pretty neutral, although a little bearish earlier this week. There was a little too much excess call-buying going into last Friday, and then again on Monday."

By today, however, "the fear level has started to rise a little again. Ultimately that's good, because that means reality comes back into the market, and more people are looking to hedge their portfolios" against potential downturns, Murphy said.

With a day of life left in April options, plenty of traders were also simply rolling out their April bets to a later date, say, in May and June contracts, said one Philadelphia-based options trader.

"It may not be a sexy story, but in the early part of week we saw rollers, both long and short," the trader said.

Which stocks got smacked back down to earth?

Amazon.com

(AMZN) - Get Report

and

America Online

(AOL)

were down 5.8% to 158 1/8 and 7% to 140, respectively.

Not surprisingly, AOL April 145 call options were among the most active on Thursday, down 5 3/8 (or $537.50 per contract) to 2 ($200 per contract) on volume of 3,474, compared with open interest of 2,698 contracts.

"I'm concerned about the valuations that have been afforded this sector," said Rob Littell, manager of quantitative and technology funds for New York's

Marque Partners

.

In a recent research piece titled "Black Paper on Internet Valuations," Littell wrote: "The Internet is the great profit-margin killer. I have watched 'value-added resellers' go out of business in the computer industry for years. Many Internet companies are just resellers of other people's stuff, and that business model is subject to competitive forces like no other."

In a week like this, most options investors are getting into QQQ puts and calls, which are options on the

Nasdaq 100

tracking stock, "as a sort of one-stop shopping in a very volatile product," Littell said.

Launched in March, the Nasdaq 100 tracking stock packages all the stocks in the Nasdaq 100 index in a single unit that trades on the

American Stock Exchange

under the ticker symbol QQQ. Each Nasdaq 100 share represents a stake in a unit investment trust that holds shares of the companies in the index.

The trust is designed to track closely the price and yield performance of the index, so Nasdaq 100 shares, including Internet issues, will move up or down in value when the index moves up or down.

"Rather than selling all their Internet stocks, investors hedge using QQQs," said Littell.