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TXN – Texas Instruments. Investors took bloody news on TXN right out of the gate today with analyst downgrades at UBS and Credit Suisse based upon the outlook for handset chips. Shares declined by 9% to $31.25. Unusual activity was apparent on the call side where it appeared that there was interest to buy calls from the open. Around 24,000 November calls have traded contributing to overall options volume of 85,000 lots representing around one in eight contracts of open interest. Outside of this activity the tone was pretty bullish given call option positioning in both January and April contracts where investors traded between the 27.5 and 40 strike prices.

WLT - Options in diversified industrial company Walter Industries (NYSE:WLT), which dabbles in a motley array of commodity-driven sectors, from coal production to homebuilding, financing, industrial products and more, are moving at more than 21 times the average volume today as shares trade a sliver higher at $28.38. The 15,000-plus options in play suggest a very bullish outlook for the company ahead of its November 1 earnings release and beyond – and with little news in the public domain, we’re intrigued by the positioning indeed. It appears that traders locked into 5,000-lot purchases in the November and January 30 calls, which were bought at a rate more than twice the existing open interest. An additional 7,500 lots were freshly sold in the December 25 puts at about $0.80 apiece. Since bottoming out in early August at $20.53, shares in Walter Industries pulled off an impressive 45% recovery to the $30 line heading into this month.

MVL - Marvel Entertainment options are moving at 8 times the norm today – the highest volume in more than a month – as shares edge half a percent lower to $23.78. The 10,000 contracts in play equal roughly 13% of the total open interest. A look at overall open interest shows more than 3 call positions open for every put – which all else being equal, may safely be considered a bullish mien on the part of investors. But of particular interest to us was heavy trading in the January 35 calls. These calls traded to the middle of the market at a dime apiece – positioning that we are inclined to think is a trader seizing on a cheap upside bet with ample time value to wager on a more than $10 upside move for Marvel shares after the Christmas shopping season. The news flow coming out of toyland offers some support of such a scenario, if you’re drawn by bullish expectations on revenues resulting Marvel’s licensing agreement with toymaker Hasbro. Timing also looks right for an upside move in Marvel – its standing 52-week high of $30.95 was set in February of this year.

CBS – Traders are poised for a decline in volatility and stabler price outlook for media conglomerate CBS (NYSE:CBS), which has grappled lately with board and management turmoil within the controlling Redstone family. Strangle selling in the January contract was enough to send options volume to more than 6 times the average volume, as shares ticked 1.2% higher to $29.44. The strategy involved selling in the January 27.50 puts at a premium of $0.85 apiece and again in the 32.50 calls at $0.50, in expectation that its shares will remain girded within the range of the strike prices heading into January. This is roughly within the range of its share price for the year to date. A look at implied volatility on these options shows traders anticipating a 30.7% degree of fluctuation for CBS shares as opposed to the 22.7% degree they have actually shown in the past.

SGP – Yesterday brought no joy to drug company Schering-Plough (SGP), which witnessed the heartless breaking of an otherwise impressive bull run on following a shortfall in Q3 earnings. Troubling for traders was listless growth in its cholesterol-drug joint venture with Merck. Shares hemmorhaged 15% in the immediate wake of the earnings report, but today’s market appears more pragmatic on a near-term prognosis. With shares up a meager 1% to $28.59, trading appears to favor puts at the 30 strike in the November and January contracts – suggesting a narrow aperture of recovery for its shares in the near term.

MER – Traders and analysts are rushing to gauge the extent of mortgage and bond-related writeoff ahead of Merrill Lynch (MER)’s earnings tomorrow. With shares down 1.7% to $65.82, it appears that some traders are availing themselves of weaker call-side premiums to wager on upside price development in the investment bank. About a quarter of today’s 120,000 active contracts are seated in November 75 calls, which were primarily bought on the offer at price of $0.30 apiece – and on a scale 3 times the existing open interest on that contract.

VIX – CBOE Volatility index If you want to get a faster reading on the next move in the direction of the major markets you should keep an eye on the so-called fear gauge. Having calmed on Monday as investors’ nerves were soothed by a market rally, the VIX is down again today but options activity is pointing to trouble ahead. There was one large play seen today, which was an outright play on a stock market rebound, but outside of that, the evidence stacks up to reflect investor concern ahead. An investor paid around a dime for 25,000 November 16 puts, which will pay off in the event that stocks go on a rampage between now and expiration. But investors also sold the 18 and 19 strikes to take in the premium and are betting that volatility is set to remain firm in coming weeks. Further still, call activity at the 25 strike was heavy - some 11,000 contracts traded - while more than 4,000 lots traded at each of the next three strike prices through 32.5. What we find noteworthy is that despite the market rebound, the cost of portfolio insurance continues to remain elevated. Don’t forget it’s not the market bears underpinning volatility. Rather it’s more nervous long positions who are duty bound to pay the escalating cost for portfolio insurance.

Source: Tuesday's Options Report: TXN, Walter, Marvel, CBS, Merrill