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Sentiment

The major averages surrendered early gains and are trading flat late Monday. With no economic data released today and a very light earnings calendar, the Dow Jones Industrial Average opened higher and extended a 156 point rally from Friday, which was spurred by a better-than-expected reading on existing home sales along with soothing words from Federal Reserve Chairman Ben Bernanke.

The rally stalled midday, however, and the financials led the market lower in afternoon action. Cautious words from Suntrust (NYSE:STI) CEO James Wells seemed to weigh on the financial sector. In comments at an Atlanta Rotary club meeting, Wells said banks are not going to improve in the "very near future" and credit losses are "continuing".

The Dow Jones Industrial Average, which was up as much as 80 points early, is down 12 points to 9,494, session lows, heading into the final 50 minutes of trading. The CBOE Volatility Index (VIX) is up .33 to 25.34. Trading in the options market is active, with 5.3 million puts and 7 million calls traded so far (a ratio of .75, compared to a 22-day average of .79.)

Bullish Flow

Some of the chipmakers are seeing bullish order flow. AMD shares are up 33 cents to $4.03 and calls are active after Citigroup upgraded the chipmaker to Buy. 30,000 contracts traded, compared to 7,300 puts. Sep and Oct 4 calls are the most actives and the interest in AMD premium has implied volatility (average) moving up to 68, from 63.5 late Friday.

Micron Tech (NASDAQ:MU) is up 2 cents to $7.16 and recent trades include 3,200 Oct 8 calls sold for 41 cents against shares at $7.17. Creating this "buy-write"--or selling calls against share--brings cost basis down to $6.76 and leaves upside to $8, or 18.3 percent, through the expiration (assuming 1 call sold for 100 shares, excluding commissions).

Bearish Flow

Bank of Montreal (NYSE:BMO) puts are seeing interest for a second time in three days. Dec 40 and 45 puts were busy Thursday. Today, shares are down 63 cents to $46.40 and another 15K puts traded, or 24X the expected for midday. About 1000 calls traded. Dec 40 and 45 puts are the most actives, but action is also being seen in Sep 45 and 40 puts. Like Thursday, the activity seems to include a mix of buyers and sellers (about two-thirds hitting offerside and ISEE = 48%).

Implied Volatility Movers

Fannie Mae (FNM) implied vols continue to run higher following another day of heavy trading. Shares are up 40 cents to $1.60 and options volume is running 9X the average daily. 112K calls and 25K puts traded so far. Implied volatility is up to 190, from about 167 late Friday.

Implied volatility is also higher in Human Genome Sciences (HGSI), Bank of Montreal (BMO), and Freddie Mac (FRE). Meanwhile, implied volatility is easing in Cell Therapeutics (NASDAQ:CTIC), Osiris Therapeutics (NASDAQ:OSIR), and Charlotte Russe (CHIC).

Source: Monday Options Recap