Ways to Play the Net Expand as HHH Options Start Trading

A new Amex product is readied for the options market.
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It's cold, but there's no snow.

Like this oddly snowless winter, option news is rolling along with the season, but the actual trading activity's been muted. That doesn't mean there's still not some money to be made trading options.

Earlier this year,

Merrill Lynch

introduced

Internet HOLDRs

(HHH)

, but they're pretty pricey. Starting this week, investors can trade options on that security.

The

American Stock Exchange

plans to start trading options on Internet HOLDRs on Wednesday, Dec. 29. The options will open with initial strike prices of 175, 180 and 185, and with position limits of 31,500 contracts. Initial expiration months will be January, February, May and August.

Every round lot of 100 shares of HHH gets you 21 shares of

America Online

(AOL)

, 13 shares of

Yahoo!

(YHOO)

, nine shares of

Amazon.com

(AMZN) - Get Report

, six shares of

eBay

(EBAY) - Get Report

and 17 shares of

Excite@Home

(ATHM) - Get Report

(and a partridge in a pear tree) among its holdings.

The advantage: The HHH requires only one trade (and commission) to buy all those stocks.

When it comes time to sell the HOLDR, instead of receiving a cash equivalent, you receive ownership of the underlying stocks. Then it's up to you to sell or hold those stocks.

HOLDRs can run investors thousands of dollars. Options on HOLDRs could be a lower-cost alternative investment and a way to go long or short the Internet via a derivatives product.

Speaking of Internet trades,

Salomon Smith Barney

bought roughly 12,000 option contracts of America Online, spread among three exchanges and between the January 80 and January 90 strike prices. Prices averaged roughly 2 7/8 ($287.50) per contract in the trade.

The runaway Nasdaq stocks that have carried this latest market rally weren't moving much today, but their options were still priced like another pop, or drop, could be in the cards before the end of January.

One independent money manager who said he's long

Qualcomm

(QCOM) - Get Report

and

Siebel Systems

(SEBL)

with options was seeing the difference. That means he has bought call options (a call option is a contract between buyer and seller which gives the buyer the right to buy stock, usually 100 shares, at an agreed-upon time and price in the future).

At roughly 10:48 a.m. EST Monday, here were Qualcomm option prices from three exchanges. The bid-ask spread -- meaning the prices at which an investor could buy ("bid) or sell ("ask") the option -- varied among the three exchanges. On Qualcomm, a January 500 call option was trading at a bid-ask of 19 1/8 and 20 5/8 on the

Chicago Board Options Exchange

; at 19 1/8 and 20 3/8 on the

Philadelphia Stock Exchange

; and at a whopping 18 5/8 and 20 3/8 spread on the

Pacific Exchange

, he said.

"It's way off line at the Pacific, possibly to attract a big institution

with the lower bid price. But that seems to me like a 'welcome to my parlor said the spider to the fly' type of attraction," the trader said. It could also be that the day's order flow wasn't headed toward the Pacific and the prices hadn't been adjusted to reflect that factor.

Spreads often get wider on volatile stocks as floor traders try to more effectively protect themselves from dramatic moves in the underlying shares of the options they trade. When such quick moves occur, the premiums they received on options sold buffer losses when they can't effectively hedge.