On Tuesday, when the

Dow

derailment pushed the

Chicago Board Options Exchange

volatility index briefly above the 30 mark, some traders thought cracking that barrier would lead to higher options prices and more market instability.

Cooler heads prevailed, and with the VIX into its second day of pulling back and sucking much of the volatility out of options prices, the traders who were selling options Tuesday are feeling awfully good about themselves today.

In options parlance, those who sell vol typically expect options prices to recede from points of high volatility, which bring spikes in contracts' premiums. They hope to collect that premium and watch the option either expire worthless or buy the instrument back at a considerably lower price.

"I sold it, and today volatility got crushed. It's just gotten smoked," said Rob Sorrentino, whose Naples, Fla.-based hedge fund seeks such opportunities in

S&P 500

index positions. The VIX, which reflects price changes in near-the-money strikes in S&P 100 options, fell more than 7% to 26.12 this morning as the Dow rallied. "It's like the Gulf War all over again," Sorrentino said.

The VIX has spent 1999 trading from about 25 to 34, but from the feel of options traffic today, many traders see it breaking out of that range. Even Sorrentino said he's planning to keep selling volatility until the VIX makes a new low. "It looks to me like we're going to punch through 25 on the VIX and the market is going to rally," he said.

That feeling wasn't even limited to short-term action.

That's right. It wasn't just bad news at

Sprint

(FON)

behind

AT&T's

(T) - Get Report

brisk options volume today.

Volume in AT&T January 55 and January 90 -- that's January 2000 -- options hit 3,912 and 3,030, respectively, and made it seem like Sprint's failures were AT&T's fortune.

Sprint's multinational Global One juggernaut looks to be fraying at the edges, and the company's long-distance chief resigned today. Sprint's main rivals, AT&T and

MCI WorldCom

(WCOM)

, are both very active overseas, and it has long been industry dogma that no truly major communications player can afford not to operate globally.

But in the pits, this matters little. An AT&T options trader in Chicago attributes the early volume to a seller of a "strangle" (or a put and call in the same expiration month but at different strike prices). "Someone is probably coming in on the volatility," the trader said. "At the same time, some positive comments from

Legg Mason

didn't hurt."

Essentially, the customer who did the trade was hoping to capitalize on the change in two of the important levers determining the premium on an option: volatility and the value of the underlying stock.

AT&T stock popped 1 5/8 to 82 7/16 by midday after the Sprint news and a Legg Mason upgrade. That rally in the company's shares pushed volatility down. The traders who sold the volatility are expecting similar action to make their positions profitable.

Another spot where decreasing volatility has led to more speculation is the

Microsoft

(MSFT) - Get Report

crowd at the

Pacific Exchange

.

Morgan Stanley

was selling puts and

Goldman

was buying calls yesterday as a period of high volatility in the software behemoth waned, traders said.

One crowd member, Joe Pach, said the implied volatility on April options got as high as 51 during a period from Friday to Monday but had come back in to a "comfortable" 49.

Those lower volatilities have attracted buyers, especially in April call contracts struck anywhere from 150 to 170, Pach said. "I'm a little surprised at the buying. I think it has a lot to do with the momentum of the rally today."