As market activity tends to slow down between now and the New Year, some analysts are recommending investors use this period to buy cheap options to protect their stock market gains against a pullback or to position themselves for rallies by year's end.

"Over the past three years, stocks have mirrored the 'post-Turkey Day nap,' entering a period of low volatility between Thanksgiving and New Year's," wrote Goldman Sachs option strategists Maria Grant and Jason Cuttler.

"Like every year, there are plenty of catalysts on the calendar, but many investors take time off making the lines at Toys R Us louder than trading floors," they said in a recent weekly research report.

The recent stock market rally has lowered the risk expectatons in the options market, and as a result many options premiums have fallen. This can create a window of opportunity should investors feel that volatility is going to start to rise, analysts said.

The Chicago Board Options Exchange volatility index or VIX has dipped below 13 and is once again approaching nine-year lows. This barometer of investor fear reflects near-term expectations of limited price movement in stock prices.

But five weeks stand between now and Dec. 31, and unstable oil prices, the wobbly dollar, the prospect of higher interest rates and political instability could be the catalysts to move the market and drive up premiums of longer-term options.

"For that reason, the VIX is unlikely to fall dramatically from these levels and investors should prepare for the possibility of greater volatility in 2005," said Frederic Ruffy, an analyst at Optionetics, a provider of investment education and analysis services.

Goldman Sachs strategists noted options premiums on exchange-traded funds in the technology sector remain at low levels and could be bought to accomplish diversification in either a broad-based or sector index.

For example, buying options on the popular Nasdaq 100 Tracking Stock (QQQ.N: Quote, Profile, Research) , an ETF that tracks 100 non-financial stocks, may make sense because of its low implied volatility -- the anticipated volatility of the index as suggested by its options prices, the firm said.

"With QQQ implied volatility low across several metrics, we believe buying index puts to hedge recent gains makes sense. Alternatively, buying calls offers a low-capital-at-risk way to maintain or increase exposure to the sector," Cuttler and Grant wrote.

For stocks which have run up dramatically this year, buying protective puts -- which give the right to sell the stock at a preset price in the future -- can serve as a hedge, said Scott Sheridan, co-founder of thinkorswim, an online options firm.

Take the technology stocks ebay Inc. (EBAY.O: Quote, Profile, Research) and Google Inc. (GOOG.O: Quote, Profile, Research) . "If someone wants to hold onto ebay stock, they may consider buying a put that expires in January 2005 to limit their downside exposure," Sheridan said.

For Google stockholders who don't expect big moves in the stock this year, this could be an opportunity for options sellers.

Sheridan suggests selling December at-the-money calls for an investor who wants protection for a long stock holding.

A call buyer has the right to purchase the stock at a predetermined price within a set period of time. It is at-the-money when the stock and strike price are the same.

Google at-the-money 175 calls which expire in December were trading early on Friday at $9.10.

"If you are long Google, you can sell the December at-the- money call and cash in on the premium, protecting your investment by about 5 percent to the downside," Sheridan said.

"On the other hand, if the stock stays unchanged and the Google option expires worthless, you will have increased your return by 5 percent in 21 days. If the stock rallies in the next few weeks, you will be limited to a 5 percent return. Your limit is the price of the option plus the stock price."

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