Options volume in

Nortel

(NT)

was brisk after some negative talk on the company from a Wall Street analyst and on word that regional phone company

BellSouth

(BLS)

said it's going to

slow spending next year.

Along with notable volume in Nortel options, the prices of those options jumped. Shares of Nortel were off $2.44, or 7.1%, to $32. Since its peak this summer, Nortel has been a heartbreaker for shareholders. Nortel's stock is 64% off its 52-week intraday peak of 89. The stock has managed to bounce off a 52-week intraday low it hit when it cratered at 31 3/8.

A

Banc of America Securities

analyst was out with a negative note on telecom-equipment maker Nortel, with the analyst raising concerns about inventory buildup. Along with the analyst comments, the BellSouth news helped smack Nortel's stock. In addition, on Tuesday, Nortel is slated to hold an analysts' meeting in Boston.

Nortel December 25 out-of-the-money puts were seeing huge volume Friday, with nearly 23,000 of the contracts trading on the

Chicago Board Options Exchange

,

American Stock Exchange

and the

Philadelphia Stock Exchange

. The puts' price climbed 3/16 ($18.75) to 15/16 ($93.75). It was unclear if the majority of investors were selling or buying the puts. If people were selling the puts, they're betting that the stock will be above 25 by expiration and the puts will expire worthless.

With the price of the options rising and the strike price significantly lower than the current share price, selling the options becomes a way to play a rebound in the shares without an outlay of capital to buy the actual shares or call options. Instead, the put sellers take on the obligation of buying the shares if they hit 25, but get paid handsomely to take that risk.

If investors were buying the puts, though, they're betting either that the stock is going to continue to get crushed or were seeking puts as protection for a Nortel stock position they already own.

The Nortel December 30 puts were seeing interest, with more than 1,000 of the puts changing hands on the CBOE, up 7/16 ($43.75) to 2 3/8 ($237.50).

Prices for Nortel options were also higher. The implied volatility portion of the price of an option was higher, according to Paul Foster, strategist at

1010WallStreet.com

in Chicago. The implied volatility portion of an option's price generally rises before a corporate news event and also with demand from investors to buy the options.

Meanwhile, don't look for much meaningful expiration-related action for the broader market this expiration Friday, according to some options analysts. Larry McMillan of

McMillan Analysis

said in a note to clients that because there's so little open interest (in index options) that expiration will be "inconsequential." He added that investors shouldn't "expect options arbitrage activity, which is destined to be tiny, to have any significant effect on the stock market this expiration."

Looking ahead, one potential market-moving event Foster's keeping an eye on is the

America Online

(AOL)

and

Time Warner

(TWX)

merger.

Judging from the spread between Time Warner and the takeover price, Wall Street is betting that the deal goes through. Under the deal, Time Warner shareholders will get 1.5 shares of AOL stock. If the deal had closed this morning, for example, with AOL trading up 90 cents to $49.75, and Time Warner trading up 71 cents to $73.70, Time Warner shares would be valued at $74.63, not a very big spread.

If for some reason the deal didn't go through, it could be a negative for the market, Foster said. He doesn't have a position in either stocks or options on AOL or Time Warner.