The holiday season is generally confusing. I always try to figure out how to peacefully break bread with disagreeable in-laws and celebrate New Year's Eve someplace where I won't end up in a fistfight.

Warm traditions aside, though, this season has unearthed a somewhat different conflict: Will options prices rise enough before year end to prove that investors haven't become too comfortable with the military success so far in Afghanistan?

Who cares? Well, certain investors try to glean future market direction based on options prices and the broad measure of them: the Chicago Board Options Exchange Volatility Index, or VIX. The VIX has been at unusually low levels considering the state of the world since Sept. 11.

But it has started to rise in the past few days, climbing to 27.75 Wednesday from 24.78 the previous Friday. The reason for confusion is simple: Why should options prices be at levels that reflect a peaceful, prosperous U.S. when the nation is at war and officially in a recession? This week's increase, though subtle, could indicate a not-too-far-off return to clear-headed thinking that factors greater political uncertainty into the market.

To veteran options traders, a low VIX -- say, in the 20-to-25 range -- means investors have grown complacent, a sentiment typically followed by a selloff. But VIX watchers have been somewhat flummoxed this year, especially in the wake of the Sept. 11 terrorist attacks. On Sept. 10, the VIX was a comfy 33.87, showing healthy concern about overall economic conditions and the potential stock market fallout. On Sept. 17, when the market reopened after the attacks, the VIX popped to 44.94, driven by a mad rush to buy put options on the broad market. (Demand for puts by investors looking to protect stock positions or speculate on weakness is what typically drives the VIX up.)

A Volatile VIX
It's moving ahead slightly after significant ups and downs

Trap Door or Open Window?

Here's the hitch, though. After that week, the VIX started a steady decline to levels in the 20s, showing a level of market comfort closer to that of the bull market's heyday. That, in turn, has created low options prices. Are those bargain-basement deals a trap or an opportunity? "The VIX is acting like it

the war against terrorism is over," says Kyle Rosen, a hedge fund manager and savvy options trader. "How do you value something that may or may not be an issue?"

Maybe that's the point. Beyond oil prices, speculating on damage or success stemming from the war is as productive as watching a Mets game in September. Something big

could

happen, but it likely won't. So investors may have stopped trying to play it.

Unlike the Mets' uncertainty, though, this bout of VIX malaise will probably only run until year end. After that, Rosen suspects, hedge fund managers will change their strategy. "Once we start the new year, there's a certain core of people who are going to decide to buy puts on the broad market so they can be as aggressive as they want to be on single stocks," he says.

It makes sense. If you buy puts, say, on the

Nasdaq 100 Unit Trust

(QQQ) - Get Report

or

S&P Depositary Receipts

(SPY) - Get Report

, those options appreciate if the market somehow implodes. Covered on that end, it enables you to endure any macro problems and hold on to individual stocks that may otherwise have good stories.

For now, though, professional money managers have just a few weeks left to hit their performance targets, so they may not be using precious capital for hedging. Instead, Rosen says, many may be looking for home runs that can give their performance bonuses a little jumpstart. "They're not in the frame of mind for hedging right now," he says.

The Chips Aren't Down

Intel

(INTC) - Get Report

has seen some fairly active call-option activity, bolstering the case for hitting bottom in the semi and semi-equipment stocks. While Intel shares fell 1.7% to $31.76 Wednesday, more than 6,400 of the December 30 and 3,100 of the December 35 calls changed hands.

Speculators could be buying the calls for a cheap play on the upside, or shareholders could be selling them as protection through year end in order to maintain their stock positions. Either way, it's a nice signal for semi bulls, says one options trader in New York.

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.