Blessed are the rumormongers, for they shall inherit the earth.

Well, maybe they're not exactly blessed. And they probably won't inherit the earth, either -- that seems reserved, like everything else, for Yankee fans. Nevertheless, they sure do make for some good trading opportunities.

Drawing the Battle Lines

Wednesday's swift 8% decline in shares of software company

Citrix Systems

(CTXS) - Get Report

and the accompanying put-option volume had the makings of an old-fashioned tug-of-war between the believers and the rumormongers.

Is Citrix Souring?
Shares plunge, then rebound this week

On the rumormongers' side were whispers that Citrix was about to be jilted by

Microsoft

(MSFT) - Get Report

. Citrix provides enterprise software for Windows operating system deployment, but Mister Softee reportedly has been eyeing a deal to acquire young Citrix rival New Moon Systems. As a result, Citrix's put-option volume rang up more than 11,000 contracts, more than double the company's average total daily options volume, according to McMillan Analysis.

Despite the stock's precipitous decline, there was an almost equal amount of call volume -- more than 10,000 contracts -- Wednesday, possibly showing that the believers took action, too.

By Thursday morning, though, Merrill Lynch analyst Robert Stimson issued a research note meant to reassure Citrix shareholders, saying that according to Microsoft, the Citrix relationship was intact and the speculation was "wildly exaggerated." Stimson added that New Moon is still a bit, well, new, to pose a threat to Citrix, reiterating his accumulate/buy rating and saying that $20 to $22 was an attractive entry price for Citrix.

That helped the stock regain some ground, as it rose 3.38% to close at $20.81 Thursday, and the put options that were bought with such rabid enthusiasm Wednesday quickly lost value. The Dec. 20 put contract, for instance, had fallen 40 cents to $1.90 by the close of Thursday's session.

At this point, there's no way to tell whether the rumor mill is spinning out bad information or if Merrill is simply supporting a stock in which it may have a vested interest. It also makes little sense to enter this fray using anything but options: Using capital either to buy or short the stock is just too much of a risk. Investors watching the situation could buy calls if they trusted the Merrill opinion or puts if they wanted to hang with the rumormongers.

Has the quick Taliban retreat in Afghanistan ended the burgeoning rally in oil-service stocks? Maybe not for good.

Dave Schultz, money manager and publisher of the

SectorVue

market newsletter, says the massive put-option buying seen this week in the

Philadelphia Stock Exchange Oil Service Index

and

Oil Service HOLDRS

(OIH) - Get Report

may signal that institutions want to stay long in the sector.

"It all has to do with oil prices," says Schultz. "Nobody knows what this puzzle is going to look like." If oil prices rise, the oil-service companies' shares have some pop. The current environment, though, holds less short-term potential.

How Investors Play It

As options prices have trended lower, institutional investors who own some of the sector's key names, such as

Smith International

(SII)

,

Global Marine

(GLM)

or

Nabors

(NBR) - Get Report

, may be opting to hold on to them and buy protective put options to buffet them from short-term weakness.

That may sound a bit counterintuitive. When a sector is falling and put-buyers emerge in large numbers, it usually means they have little faith in a rebound. The timing of this, however, makes the equation slightly different.

Thursday's action was typical of what's been seen most of the week, especially leading into Friday's options expiration. More than 13,000 contracts traded in both November 85 and December 75 Oil Service Index puts.

That action is probably an investor moving a protective position into the December expiration month and ratcheting down the strike price, anticipating more weakness in the stocks through year end.

The Oil Service HOLDRS have fallen 18% since Nov. 9, making them fodder for both put-buyers speculating on continued weakness because of oil-price stability and for those banking on more uncertainty as a result of the U.S. war on terrorism.

"Everyone knows the market is cheap right now," Schultz says. "And institutions are buying puts to hang in there."

As originally published, this story contained an error. Please see

Corrections and Clarifications.

Dan Colarusso is a New York-based financial writer. His recent work has appeared in The New York Times, Barron's, Institutional Investor and Investment Dealers' Digest. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Colarusso welcomes

your feedback.