Even with the recent rally, options action is displaying a mainly hedging and protective quality, as indicated by the put/call ratio. Although this reading has been drifting lower in recent days, it still has been registering levels near the high end of the yearly range.

Thursday's equity-only put/call reading was 0.61 in recent trading, and the put/call for index products was a fairly protective 1.51. In fact, Wednesday's volume leader was the

Nasdaq 100 Trust

(QQQ) - Get Report

$38 put, which traded some 80,000 contracts. Meanwhile, the prior open interest in the strike was just 60,000 contracts.

Somewhat contradictory to this defensiveness, the Volatility Index (VIX) has tumbled some 17% since the election. At 12.80 in recent action today, the VIX is threatening to hit a new nine-year low.

Big Names, Big Volume

The past week's most active options list has been dominated by the usual big names such as

Intel

(INTC) - Get Report

,

Pfizer

(PFE) - Get Report

,

Dell

(DELL) - Get Report

,

Cisco

(CSCO) - Get Report

,

Motorola

(MOT)

and

Delta Air Lines

(DAL) - Get Report

.

These names also are worth noting because they lead the list of unusual option activity. They have logged volume of at least 25% above their daily averages at some point this week. The reasons are easy to identify in the list above: respectively, a dividend boost, a drug problem, earnings, earnings, promise that last year's inventory problem will not be repeated, and avoidance of bankruptcy.

The increase in volume is industrywide as the use of options becomes more accepted for both speculation and hedging purposes. According to the Options Clearing Corp., or OCC, exchange-traded volume surpassed 1 billion contracts this past Tuesday. It marked the first time this figure had been reached in a single calendar year, and more than seven weeks remain in 2004. Total year-to-date option volume is running some 30% ahead of last year, with a daily average of 4.6 million contracts compared with 3.6 million in 2003.

The two biggest factors driving the increase in volume are electronic trading, which has increased efficiency and lowered transaction costs, and the explosion in exchange-traded funds and index-related products. This surge has benefited all six options exchanges: Each has enjoyed an increase in volume.

The International Securities Exchange, or ISE, which had grown to become the equity options leader within its first three years thanks to its all-electronic platform, seems to have seen its market share stabilize around 34% of all equity options. It has, however, seen a steady increase in volume.

The competitive pressure from the ISE forced the Chicago Board of Options Exchange, or CBOE, to accelerate its Hybrid and electronic trading system. That has stemmed the flow of business, and the CBOE now holds about 33% of equity option market share. This is down from its dominant position a decade ago, when it garnered nearly 70% share. It has, however, reversed the downtrend of a year ago, when its share slipped below 30%. A true sign that a rising tide lifts all boats is that the Philadelphia and Pacific exchanges, and even the ne'er-do-well Amex, have enjoyed percentage increases in volume this year.

Less Exclusivity Means More Business

The Russell Investment Group, realizing it's good business to spread the wealth, announced Monday that it would begin seeking multiple exchange listings once its exclusive licensing agreement with the CBOE expires Dec. 31, 2004. Russell is already negotiating with all six option exchanges to attain licenses to trade options based on all 21 of its index-related products, including the popular Russell 2000 Small Cap Index. Russell says that since it shifted from exclusive deals to multiple listings on its ETF products two years ago, volume has increased tenfold.

This is an important step in breaking the CBOE's near-monopolistic hold on index options. Russell's decision to not renew the two-year-old agreement confirms my previously stated view that

limiting or preventing trading of a product, such as the

S&P 500 Depositary Receipts

(SPY) - Get Report

, or Spyders, does not make sense for the exchanges or the licensee. More overall volume leads to more revenue for both groups, and increased competition of multiple listings definitely is good for the customer.

I certainly understand CBOE's desire to protect the legal rights bestowed by the exclusive contract and get a return on the money invested in marketing and developing the various contracts. And I can't argue that the licensee can do as it sees fit with its intellectual property. But I do hope Standard & Poor's parent

McGraw-Hill

(MHP)

sees the benefits of nonexclusive deals and moves to multiple listings when its current contract with the CBOE expires.

Trade the Options Broker

Get ready for the next hot IPO as online broker OptionsXpress should get priced by the end of this month. The firm has had tremendous success by offering progressive tools and top-notch customer service -- it is a two-time winner of

Barron's

annual ranking of the best online brokers -- and has seen accounts grow from less than 30,000 to over 100,000 in the past two years.

It's tough to get a valuation just yet, but consider these numbers. The company had $50 million in revenue for 2003 and could show above a 100% increase for 2004 based on growth in customer accounts and increased trading volume. OptionsXpress customer trading activity represented approximately 3.5% of all listed options volume in the U.S. at the beginning of 2004. And last January, Summit Partners invested $90 million for an undisclosed minority stake in OptionsXpress. My guess is that market capitalization could quickly cross the $1 billion mark if the offering is well received.

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from 1989 to 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to

steve.smith@thestreet.com.