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Sentiment

Stocks traded in a narrow range in cautious early trading, but the major averages are holding modest gains late Wednesday. After falling 104-points Tuesday, the Dow Jones Industrial Average opened modestly lower amid ongoing worries about credit after rating agencies recently downgraded government debt of countries like Spain and Greece.

With no earnings of significance and little economic data to guide the early action, the Dow traded in a narrow range and was flat into midday. However, positive comments from CNBC's Jim Cramer helped lift Apple Computer (NASDAQ:AAPL) and the tech-heavy Nasdaq late in the day. The Nasdaq erased early losses and is up 10 points late.

3M (NYSE:MMM), which was upgraded to Buy at Citi, is the best gainer in the Dow, up 3.6 percent. Twenty of the Dow thirty are higher and the industrial average is up 50 points. With about forty minutes left to trade, the CBOE Volatility Index (.VIX) is down .95 to 22.74. Trading in the options market is running about the normal levels, with approximately 4.9 million puts and 6.3 million calls traded so far (a ratio of .78, compared to a 22-day average of .76.)

Bullish Flow

Sun Micro (JAVA) is off 2 cents to $8.47 and the Jan - Apr 9 call spread is bought at 12 cents, 12500X on PHLX. In fact, it has traded several times today and volume in both contracts now exceeds 21,500. This is possibly a roll or a time spread. Recall that Oracle has made a $9.50 per share cash bid for JAVA and is awaiting EU clearance. The EU hearing begins tomorrow and CNBC's David Saber today notes that European Commissioner Kroes said that she "is still optimistic that we can reach a satisfactory outcome that will ensure that there is no adverse impact on effective competition in the European market." Today's time spread or roll from Jan to Apr might be on the view that, while a deal might indeed happen at $9.50 per share, it's more likely to happen by April rather than mid-January.

Bearish Flow

Pepsico (NYSE:PEP) gapped lower and is off $2.45 to $61.03 after the company trimmed its 2009 earnings outlook and, separately, said it was dropping its Gatorade drink named after golfer Tiger Woods. Shares are down and options volume is about 4x the expected for midday, with 11K calls and 7330 puts traded. Dec and Jan10 calls at the $62.5 strike are the most actives, as some investors might be selling to close positions on the news. Dec 60 and Jan10 57.5 puts are seeing some action as well. Implied volatility (average) is up to 19.5, from about 18.8 late yesterday.

Implied Volatility Movers

Lululemon Athletica (NASDAQ:LULU), the Vancouver based athletic clothing maker, is up 58 cents to $27.39 and options activity is heating up ahead of earnings, due out after the closing bell. Most of the action is in Jan10 puts at the 25 line, with 7,000 traded, 75 percent hitting ask-side, and existing open interest of 2,682. Implied volatility in the contract is up to 67 (+6.4 percent), as it appears that premium buyers are opening new positions in those puts ahead of the news.

Unusual Volume Movers

Select Sector Energy (NYSEARCA:XLE) is seeing 4X average daily trading volume, with 203,000 contracts traded and put volume representing 83 percent of today's activity.

Brocade (NASDAQ:BRCD) is seeing 2X average trading volume, with 73,000 contracts traded and calls representing 91 percent of today's trading activity.

Tesoro (NYSE:TSO) is seeing 11X normal trading volume. 49,000 contracts have traded, with call options representing 90 percent of today's volume.

Unusual volume (two times or more than normal average volume) is also being seen in Burlington Northern (BNI), Disney (NYSE:DIS), and Select Sector Utilities (NYSEARCA:XLU).

Source: Wednesday Options Recap