The Monday announcement by

3Com

(COMS)

that it would distribute all of its shares of

Palm

(PALM)

spurred a Tuesday wave of options activity in Palm.

3Com said it will distribute its stake in Palm as a dividend on July 27 to shareholders of record as of July 11. Palm was getting crushed, off 3 1/2 to 28 3/4.

Based on 351 million shares of 3Com stock outstanding as of April 24, the ratio would be about 1.5 shares of Palm for each 3Com share. However, there are about 14 million immediately exercisable employee options on 3Com stock that can be exercised before July 11.

On the

Chicago Board Options Exchange

, nearly 1,200 of the August 30 Palm puts have traded, while on the

Pacific Exchange

, 1,357 August 30 puts have changed hands. The contracts were trading at 8 1/8 ($812.50), up 1 1/2 ($150).

Paul Foster, the options strategist at

1010WallStreet.com

, said the June 30 calls had an implied volatility of 77, while the volatility on the June 30 puts was 113. The puts were more expensive, indicating to Foster that currently there was a bearish "tint" on Palm's stock.

Implied volatility is the annualized measure of how much the market thinks a stock or index can potentially move; it is a critical factor in an option's price.

In a research note Tuesday,

Morgan Stanley Dean Witter

pointed out that although "an increase in the float is still an issue, we suspect that a lot of 3Com shares are currently owned by people who want to own Palm. We are hopeful that, knowing more, investors can now start to see beyond this arbitrage."

Further out, more than 9,000 of Palm's August 45 calls have traded and were trading at 1 ($100), down 5/8 ($62.50). As for the August 45 puts, 5,700 contracts have traded. The contracts were trading at 20 1/8 ($2,012.50), up 1 1/2 ($150). The heavy volume at a strike so far out on the calendar could be part of a combination trade, where an investor sells one strike price to defray the cost of buying another.

Palm's IPO was priced at $38 a share in March. As for 3Com, its stock was up 3 7/8 to 47 9/16.

Meanwhile, the options market appears to be enduring another light trading session overall, mimicking the equity market.

"It's very quiet," said Michael Schwartz, chief options strategist at

CIBC Oppenheimer

, noting that people are just waiting for the May 16

Federal Open Market Committee

meeting. Many analysts expect the Fed to raise the federal funds rate by 50 basis points.

Investors were nibbling

again in call options on

Lycos

(LCOS)

, which has been rumored to be in the takeover sights of

Vodafone AirTouch

(VOD) - Get Report

, the wireless giant.

Shares of Lycos were higher, up 2 to 50.

Foster said the volatility in the June 50s was at 110, which is "well above average." He said that the average volatility in Lycos over the last month has been in the low 90s and over the last two to three months it was in the mid-80s.

On the

American Stock Exchange

, 250 of the 47 1/2 May calls changed hands. The May 47 1/2 calls were trading at 5 ($500), up 1/2 ($50). The May 50 calls on the CBOE traded 210 contracts and have risen 1 ($100) to 5 ($500).