U.S. stocks opened sharply lower on Thursday, with the Dow Jones industrial average down 1.3 percent. The CBOE Volatility Index <.VIX>, the market's favored gauge of Wall Street anxiety, jumped 14 percent to 23.46, the highest since mid-December. [.N]

After several days of lackluster volume, traders took to the options market with gusto on Thursday. About 6.25 million contracts traded in the first hour and volume is projected to hit 22 million contracts for the day, about twice the average volume for the last 10 days, according to options analytics firm Trade Alert.

Trading in puts conveying the right to sell stocks at a set price in the future exceeded calls that provide a comparable option to buy them at a later date by a 1.2-to-1 margin. This so-called put-to-call ratio was the most bearish since December 11.

While buying of protective puts on the Standard & Poor's 500 index and SPDR S&P 500 ETF <.SPY> was higher than usual, it was not at extreme levels, said Jim Smith, options strategist at OTR Global.

"I would characterize the underlying tone as cautious. Definitely some angst, but not panic," Trade Alert's Fred Ruffy said.

Materials was one sector that appeared notably more bearish than others, with the put-to-call ratio on the Materials Select Sector SPDR's (>> Materials Select Sector SPDR) options at a record high of 135-to-1. About 72,000 contracts traded, or 8.5 times the average daily volume.

A trader paid about $3.5 million on a bet that the fund's shares drop below $35 by mid-March. The ETF has fallen 5.4 percent this year and its shares were down 1.6 percent at $40.92 early Thursday afternoon.

But it was not all doom and gloom. Some appeared to be betting on a near-term rebound in the China Large-Cap Exchange Traded Fund (>> iShares FTSE/Xinhua China 25 Index (ETF)).

The fund, which gives U.S.-based investors exposure to 50 of the largest Chinese stocks traded on the Hong Kong Stock Exchange, has shed a fifth of its value over the last six months and was down 2.3 percent to $32.44 on Thursday.

Calls betting on the shares rising above $34 by mid-January, implying a gain of more than 5 percent from current levels, were the second-most active options with more than 80,000 contracts traded.

(Reporting by Saqib Iqbal Ahmed; Editing by Richard Chang)

By Saqib Iqbal Ahmed