As rising oil prices affect every sector of the economy, speculation on related sectors perks up. This time around though, some tough options pricing is keeping the

Philadelphia Stock Exchange's Oil Services Index

from attracting waves of players.

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Experienced traders often use options on the Philly index, affectionately called the OSX, to play any significant move in oil prices. These options, however, are trading at notoriously wide, customer-unfriendly spreads. Friday, for instance, the in-the-money March 55 call options were trading at a spread -- the difference between the bid and the asking price -- as wide as a dollar.

That didn't stop some investors. On Thursday, OSX February 90 calls jumped 7/16 ($43.75) to 1 ($100) and the March 90 calls added 3/4 ($75) to 3 7/8 ($387.50). The most-active options were the out-of-the-money March 75 puts, down 1/4 ($25) to 2 7/8 ($287.50) on volume of more than 1,000 contracts.

And Friday, with the OSX up 2 3/64 to 86 37/64, those same March 90 calls rocked again, up 1 1/4 ($125) to 5 1/8 ($512.50) with over 4,000 contracts traded against open interest of 5,400.

The OSX spreads have been historically wide because the basket of underlying stocks has been volatile, according to a spokesman for

Susquehanna

, the OSX specialist. "It's an institutional product. The orders trade in large size. There aren't a lot of customers, but those who do are really big," he says. "They understand that it should be that wide."

The

AMEX's

Energy Sector SPDR Fund

(XLE) - Get Report

is slightly better if only because it's cheap, trading up 13/64 to 26 15/64. This SPDR instrument also has options, and a list of its components can be found on the AMEX

Web site.

For traders chasing individual names, the game has become more difficult because of consolidation in the sector and uncertainty over

OPEC's

next meeting.

"

Atlantic Richfield

(ARC) - Get Report

, for instance, is a company dying to finish a deal with

BP Amoco

(BPA)

," but its marriage partner is under scrutiny from U.S. regulators, says Paul Foster with

1010wallstreet.com

in Chicago.

"You don't want to be a buyer of call options until the deal gets a little closer," Foster says. "You just don't get the edge in this situation. It's too volatile."

However, he would recommend, for instance, buying stock in ARC or

ExxonMobil

(XOM) - Get Report

on dips, waiting for the stock to rise a bit, then selling some out-of-the-money call options. (Out-of-the-money means above the current stock price when referring to calls; for puts, it means below the current stock price.)

AnnTaylor Stores

(ANN)

options got dressed up Friday, with the February 17 1/2 calls adding 3/4 ($75) to 1 ($100) on heavy volume, roughly 900 contracts, well above the open interest of just 127.

AnnTaylor stock was up 1 to 16 7/8, and is slowly coming back from historic lows. Traders could be anticipating a little more appreciation before the February expiration.

Elsewhere in options trading, massive orders for more than 10,000 contracts each in

America Online

(AOL)

March 60 and 65 call options traded on the Philadelphia Stock Exchange this morning.

A trader sold the March 65 calls at a price of 1 5/8 ($162.50) and turned around to buy roughly 10,000 March 60 calls at an average price of 3 ($300).

It's a trade worth noting, since Susquehanna is the market maker for AOL on the PHLX, and is among the specialist firms there angling to

attract more order flow to the fourth-ranked exchange.

AOL stock is down 1/2 to 57 4/5.

It's More Than A Feelin'...

The

Chicago Board Option Exchange's Volatility Index

, the VIX, closed Thursday at 24.38, near the top of its historical range of 17 to 25, and Friday popped 7% to 26.24.

The VIX, known as the market's "fear gauge," seems to be indicating a nervous market, mainly due to the

inverted Treasury yield curve (with 10-year notes treasury yielding more than 30-year bonds).

Ironically, all of this concern stems from the very positive scenario that the national debt might be erased by the year 2013. If the 30-year Treasury bond becomes a thing of the past, Wall Street will be losing a beloved benchmark, writes Lance Ettus

of ValueLine Options

.

"Combine this loss with the recent performance of the seeming gravity-defiant tech stocks and we have a market that is moving into 'uncharted territory.' "

And with options already

expensive, a rising VIX will only keep premiums high.

"With premiums being high, insurance is expensive. Usually situations like this create ample premium selling opportunities, as in covered call writing, but we also urge that you put on long put and call positions as well, bearing in mind that we could expect some future volatility," Ettus wrote in Friday's note.