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The great Internet unwinding has begun -- at least in the options market.

Among the most actively bought and sold Internet options Tuesday were those of




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America Online



"The correction of last summer came from much higher levels," said

R.F. Lafferty's

Jay Shartsis. "You only get a high put/call

ratio when the markets get clobbered, so there's a lot of serious momentum. There's plenty more downside to come.

"This is the same decline that began after the last expiration

on July 16. I've got one guy 'naked' plenty of DOT puts, and it scares me," he added. (The DOT is the Internet Sector

index of 20 Net stocks.)

Some Net stocks are simply catching up with the slow but steady losses in other Net issues, such as


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. "It has the oddest chart. It used to be so volatile, and now it's simply been in a quiet downtrend," Shartsis said.

Amazon's August 110 puts shot up 3 1/2 ($350) to 21 ($2,100) on volume of 3,359, nearly equal to the open interest. August 85 puts also topped the most-actives list, up 1 5/8 ($162.50) to 4 5/8 ($462.50). The stock price was down 2 13/16 to 91 1/8.

For a different reason,


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options were among the most actively traded, with the August 50 calls bid up as much as 7/8 ($87.50) to 1 9/16 ($156.25).

Business Week Online

reported that Excite@Home was in merger talks with Yahoo!. By midday, however, Excite's president had

denied the report, and the call price sank back to 7/8 ($87.50) on volume of over 3,000 contracts. Open interest in the strike totaled over 10,500 contracts.

Excite's stock, meanwhile, was down 3/4 to 42 3/16.

Continued put activity in

Bell Atlantic


pushed the Baby Bell telephone company onto the most-actives list again Tuesday, with 2001 January 55 puts up 1/2 ($50) to 4 1/2 ($450) on volume of 2,200 contracts, just slightly greater than the open interest of 2,184.

I Know What You Did Last Summer

As with fortunetellers, technical analysts are often looked at askance by options investors. Most investors don't want to believe in what they say, but in times of crisis like today, they'll turn to them.

For instance, two widely watched options sentiment indicators, the put/call ratio and the volatility index, a key fear gauge, are retracing eerie trends from last summer. These ratios are hitting last summer's same inflection points nearly to the day.

"Probably it sounds like I'm reading from last summer's book," laughed Chris Johnson, a quantitative analysis manager with

Schaeffer's Investment Research

in Cincinnati, Ohio. "But everybody is making the same comparisons."

What Johnson and other quants are fixated on are two numbers: the 21-day moving average of the

Chicago Board Options Exchange's

equity put/call ratio (


the total put/call ratio), which Johnson calls "one of the more reliable indicators of investor sentiment," and the CBOE's volatility index, or VIX.

As of July 19, the 21-day moving average of the ratio dropped to 0.38 and then started to increase to its current level of 0.40. In other words, the ratio hit a valley and started climbing.

The last six times this ratio has dropped to 0.38 and then ramped back up, the stock market either got stuck in a trading range (August 1997, May 1998 and February 1999) or started sliding (February 1997, October 1997 and August 1998).

As of Monday, the 21-day moving average had hit 0.44. So far, this has meant the market is in a trading range, but Johnson said he's looking for the ratio to hit an inflection point of 0.50 or so.

The second number, the VIX, is the stock market's tarot card. Earlier this summer, the index descended to the teens, a level it last resided at in July of 1998. The market topped out at the time. Over the past few weeks, the measure crept up to hover around the 25 level, bumping up against the ceiling of a key historical trading range.

The VIX also closed above 26 for two consecutive trading sessions -- on July 31, 1998 and Aug. 3, 1998 -- before trending higher; the stock market went into a tailspin not long after.

History may never predict the future. But remember that the VIX closed above 25 both last Thursday, July 29, and Friday, July 30 -- at 25.83 and 25.08, respectively. The VIX closed Monday at 26.12.

"This year, as last year, there's the same dismissive attitude toward good earnings. Nobody was getting excited over them last year, although we also had a huge liquidity squeeze back then. This year, fear of inflation is more prevalent. So that changes one thing," Johnson said. "We're not as bearish as we were last year, but there are signs of deterioration."