Place the peanut oil in a 4 to 5-quart Dutch oven and place over medium-high heat. Heat oil until it reaches 375 degrees F.
Rinse the squid thoroughly and pat dry. Cut the tentacles in half lengthwise and the tubes into 1/2-inch rings. Set aside.
Place the egg, water and flour into a bowl and whisk thoroughly to combine. In small handfuls, dip the squid in the batter and shake off the excess. In batches, gently lower the squid into the hot oil. Cook for 1 minute. The squid will not be browned, but lightly golden in color. Remove the squid and transfer to a cooling rack turned upside down set over a newspaper-lined sheet pan. Season with salt and pepper, as desired. Repeat until all of the squid is cooked. Make sure to check the temperature of the oil before each batch to ensure it is 375 degrees F. Serve immediately.
Recipe courtesy of Alton Brown, 2006