Yahoo! Recedes but Net Stays Hot

As the Internet stock sector and overall market waited breathlessly for the

Yahoo!

(YHOO)

earnings release Wednesday, options traders were fed a steady diet of higher prices as speculators played the possibilities.

Like any postearnings options, though, premium contracted this morning as Yahoo! fell about 1%, to 205, despite hitting its numbers. Yet despite an event that can drive volatility up in even the most sedate stocks, Yahoo! premium levels weren't giving up too much ground.

Shares of

America Online

(AOL)

were down, as were

Excite

(XCIT)

and

Cisco

(CSCO) - Get Report

.

And while the implied volatility levels across the sector rose some on Yahoo! expectations, the rest of the sector hasn't pulled back at all and as the market rallies, those volatilities are again seeking the high ground they owned late last year.

"These Internet stocks just won't quit. Sure, the implied volatility may move within a range of 90 to 120

as factored into the option price, but you won't have any lowering of volatility into the 50s and 60s anytime soon," says Hank Nothnagel, strategist with Chicago's

Everen Securities

. "These stocks have too much going on."

The year-and-a-half surge in Internet stocks has driven up the volatility component of the option price in Yahoo! and other Net stocks.

Paul Foster,

1010WallStreet.com

strategist in Chicago, said the volatility on Yahoo! at-the-money Aprils last night was at 102. Thursday, after Yahoo! reported earnings, that volatility was down to 89.

If anything, the earnings showed Yahoo! is a mortal market being and that Internet stocks in general might be human.

"Vol is still really high, higher than anything we've seen in a long time, and compared to everything else in the marketplace," adds Nothnagel.

Volatility for

eBay

(EBAY) - Get Report

remains at 120, and

Amazon.com

(AMZN) - Get Report

at 96.

Compare that with a non-.com company such as

Pfizer

(PFE) - Get Report

, with a volatility component of 31.

"There is still going to be mania for premium

paid for volatility," he adds. "These stocks could explode in either direction."

Down in the

Chicago Board Options Exchange

options trading pits, the specialist on

Peoplesoft

(PSFT)

saw a large put spread hit the options this morning.

A calendar spread usually involves the purchase of a farther month option and the simultaneous sale of the nearer month. These will usually be calls if bullish, or puts if bearish.

According to traders, the holder of April 20 puts sold roughly 850 contracts at 7 ($700 per contract) so that he or she could buy 1,884 May 20 puts at exactly the same price. In essence, the holder took advantage of the fact that there was no difference in price -- no "premium" -- to be paid for a put option one month further out.