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Options Players Dip Back Into Internet, Tech Favorites

However, the tone of some trading has a bearish tinge.

Options investors were cautiously dipping back into their tech and Internet favorites Wednesday while keeping a wary eye on a strong


and a weak-kneed


. Not surprisingly, some of the activity was taking on a bearish tinge.

The put/call ratio was heavy again at 0.52 on the

Chicago Board Options Exchange

, compared to 0.38 for all previous activity. That means calls were outpacing puts by only 2-1, instead of their usual 3-1, which in turn means more put plays and more bearish sentiment.

However, those put numbers may be skewed by some rampant put buying in just two stocks,


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America Online


. "If you take out the put volume on those two stocks, it doesn't look all that bearish," said Michael Schwartz, chief options strategist for

CIBC World Markets


DuPont was being squeezed by a complex arbitrage play investors were constructing around the chemical giant's offer to its shareholders to swap 2.95 shares of



for one share of DuPont. The swap offer expires Aug. 6. Conoco, a previously wholly owned subsidiary of DuPont, was partially spun off in an IPO in 1998. At current share prices, investors could make almost $5 per share in value on the swap. With Conoco trading this afternoon at 26 1/8, up 5/16, the shares would have a value of around $77.08 in the swap (26 1/8 times 2.95). DuPont was trading this afternoon at 72 1/4, up 9/16.

Interestingly, for all the buying pressure on the DuPont stock, arbitragers playing this game have to be careful not to drive the price too high and ruin their configuration. More than 7 million shares of DuPont traded hands by the afternoon, twice its average trading volume.

Option players were buying up puts -- mostly the in-the-money August 85 and 90 puts -- as a hedge against their massive buying of the common stock. Also active were out-of-the-money calls -- the October 75s and 85s moved a combined 10,500 contracts. Possibly, speculators were betting that DuPont could see a rise in earnings (and as a result, its stock price) by reducing the number of shares outstanding in the swap, said Schwartz at CIBC.

Both stocks were under bear attack for different reasons.

AOL's case of the bearish blues was much simpler to explain. Investor sentiment has shifted on the stock since it still stubbornly refuses to bounce back to its previous higher levels, said Joe Sunderman, senior research analyst for

Schaeffer Investment Research

. The stock has lost about 30% since mid-July, when it was around 125, and 15% since the end of last month, when it was around 102. The stock was at 87 1/16, down 1 3/4, this afternoon. "And it's not coming back like it usually has," Sunderman noted.

Investors, or more accurately the Community of True Believers that make up AOL's fan base, only on Wednesday began to switch from rabid call buying to equally active put buying.

Ironically, both sides of the action were centered around the August 100 strikes. About 4,885 contracts of the August 100 puts moved, and about 2,070 contracts in the September 100 puts also traded.

"After such a build-up in calls, you are really seeing some capitulation here," said Sunderman. The put buying was done in both small and large blocks, indicating both retail and institutional investors were actively seeking some bearish speculation, he added.