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Volatility Holds High and Steady in Internet Options

Options pros remain wary of further movement.

Wall Street continues to Webify, with major brokerage firms such as

Merrill Lynch


at long last

embracing the Internet, but that didn't necessarily help zigzagging Internet-related options at the start of this four-day trading week.

These days, however, it takes more than adding a dot-com component to juice the interest of the bulls.

If anything, implied volatility in bellwether Internet issues has remained steady, with percentages for

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holding in the 80s.

Investors in Internet options have come to view these instruments a bit like a boisterous uncle, grown slightly saner with age, but with the potential to blow up at any barbecue.

That belief is coming through the volatility levels in Internet options -- that is, the figure equal to the percentage that the underlying stock could fluctuate on an annualized basis. Those readings remain at high worry levels.

Even though the underlying Internet stock prices are starting to deterioriate, "volatilities in their options, especially on the big guys, are not budging, nor have they been in the past six weeks," said Kyle Rosen, president of

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Rosen Capital Management

. "The worse the company, the higher the volatility. In the crummier

Internet companies, the volatilities are in excess of 100. Options traders seem to recognize which companies aren't really worth anything. Plus, the float is so small, it still doesn't take much to get a 50% rebound in the stock."

While investors are getting a little more comfortable with parameters of

America Online


and Yahoo!, "the volatilities won't come in for awhile," Rosen said. "Yes, you're seeing a very reluctant but steady directional move to downside, as the stock moves get less crazy, but only slightly less crazy."

Among the most active Internet options,



July 70 calls dropped 3/16 ($18.75) to 1 1/8 ($112.50) on volume of 1,500 contracts. The stock was down 4 to 40 1/4.

Separately, volume remained thin in the market as stock, bond and derivatives investors wait for some hints from economic data due out Friday. "I won't be doing anything this week unless someone twists my arm to sell a few strangles," a combination involving puts and calls at different strike prices but with the same expiration date, Rosen said. "I'll wait to see the market move 5% on either side; at 10,000, I'll start buying, and at 10,800, I'll start shorting."

Investors appeared to be picking their battles, taking positions in technology bellwethers such as


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. "It looked like one foreign buyer coming in, but we don't know who crossed it because the broker was independent," said the crowd representative in the Chicago pit. Roughly 5,440 October 80 calls crossed at 6 1/4 ($625), up 1/2 ($50). Open interest was a mere 322 contracts.