Traders Glued to Their Seats During Options Fright Show

DOT options suffer, thanks to -- guess what? -- underlying stocks' weakness.
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The mood surrounding the options market appears fearful, with volatility solidly in scary territory, but investors are still at the table.

"The bottom line is, it feels like long activity is really drying up," said Michelle Skupp of the

Miller Tabak

options team in New York. "It feels different than it was, but of course we've had a run in the market for such a long time."

"People around here think it's getting eerie," added one Chicago-based options trader. He said some trading desks are starting to look at arbitrage opportunities, "since some of these deals are going to break with everyone getting hammered so hard on their stock prices."

For instance,

Global Crossing

(GBLX)

and

Frontier

(FRO) - Get Report

have been topping the most-actives list for the past few weeks. Global is buying Frontier.

Options investors, though, are betting heavily with puts and calls on a wager that if Global's stock drops too much, Frontier may demand that Global increase its offer, he said. Global was down another 11% Tuesday to 27 1/4.

Meanwhile,

TheStreet.com Internet Sector

index, or DOT, options were hit hard on continuing weakness in the underlying Internet stocks. The DOT was down 2.75% to 466.84, and August 450 calls slid 28 ($2,800) to 30 ($3,000), though only one contract had traded. Open interest totaled 23 contracts. The most heavily traded DOT option was the August 850 call, as the most recently crossed trade of 650 contracts showed the market priced the security as nearly worthless. The price had dropped 1 15/6 ($193.75) to 1/16 ($6.25), or in options parlance, a "teenie."

Of course that doesn't mean investors are getting out of options altogether, and, in fact, statistics suggest completely the opposite. On July 16, equity options trading hit an all-time volume record with 2.84 million contracts traded, compared with average daily volume of 1.61 million, according to figures from the

Options Industry Council

. Open interest also peaked that day at over 44 million contracts (that's one indicator of longer-term investing in equity options).

Among individual options,

Amkor Technology

(AMKR) - Get Report

continued a strong rise after last week's earnings. Even with the stock price down slightly, 5/16 to 17 3/4, call options in the semiconductor packaging and test services company had ticked up across several strike prices. On thin volume, August 17 1/2 calls were unchanged at 1 ($100) per contract, but September 17 1/2 calls were up 3/16 ($18.75) to 1 11/16 ($168.75) and December 17 1/2 calls gained 3/8 ($37.50) to 3 1/4 ($325).

Heavy activity in normally quiet

Intermedia Communications

(ICIX)

popped up with a 3,500-contract trade in the September 20 puts, up 1/4 ($25) to 1 3/4 ($175). Open interest totaled 170 contracts. The stock was down 1 7/16 to 20 1/2. Intermedia is a telecommunications provider, offering local, long distance and data service.

Finally, here's an update to Monday's trading on

Guidant

(GDT)

: A large institutional desk was responsible for the 5,000-contract slug of October 60 calls on

Monday and another several thousand contracts Tuesday. "The customer was thinking the stock perhaps had most of its run, so he sold calls and took in the premium," said one person familiar with the trade. "He must still be long the stock as well though," and in addition sold several thousand more October 60 calls. Open interest as of Tuesday in that strike totaled over 11,000 contracts.