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(NYSE:C)- A rebound in shares in Citigroup this morning to $34.92 (+5.4%) has them as the largest component gainer within the XLF financial ETF. Options activity is frantic with some 175,000 contracts trading ahead of noon. The put/call ratio at 1.95 indicates twice as many investors are backing the hunch that shares will inevitably rebound. Implied volatility has slumped 18% over the course of the weekend indicating less nervousness surrounding the prospects for the financial giant.

It does, however, seem as though there is some shrewd motivation behind the plethora of call trading in today’s session. We’re seeing plenty of call selling as we review the tape indicating one of three things. First, today’s action is large relative to current open interest standing, where in the December contract we’re seeing the equivalent to around one half of the position in play. This could indicate that investors who previously bought calls are taking advantage of the improved tone to bank profits. It could also be symptomatic of traders willing to cap a lid on any stock gain ahead of the expiration of the December contract. The large blocks going through in the Dec 35 calls imply a breakeven of $37.15 while at the 40 strike the premium implies a breakeven of $40.43 meaning shares would need to rise almost 16% by expiration. Of 23,000 lots traded in that contract this morning some 19,000 lots were traded to the bid. The other alternative is that investors are buying Citi shares and taking in the premium to enhance yield.

(NYSE:HRB)– H&R Block – Shares in H&R Block advanced 4% to $19.76, with a 28,000-lot transaction in the January 20 puts sending today’s total moving option volume to 6.7 times the daily average and put volume to its highest level in more than 2 months. A check of time and sales does not reveal the direction of the trade, but a look at overall open interest shows investors residually defensive on H&R Block shares, with 2.8 put positions open for every call. Implied volatility on these options stands at nearly 50% as of this dispatch – a sign that investors are expecting a 64% greater degree of turbulence than its shares have shown historically. Earlier this month its CFO resigned abruptly, and the company has struggled mightily with its subprime-exposed Option One Mortgage division, which has been the subject of a long-drawn-out and failed divestiture. Internal strife fulminated with the replacement in September of three members of H&R Block’s board of directors with former SEC-chairman-turned-activist-shareholder Richard Breeden and two of his appointees. A look at the sustained level of elevated implied volatility in H&R Block is a hint that the market isn’t fully resolved about the forward prospects for the company – the current reading represents a 54% increase from the gauge at the start of the month, and has remained consistently high in the interim.

(NASDAQ:ETFC) – Shares in online brokerage E*Trade Financial took a mighty 54% stumble to $3.92 this morning, dipping below half the value of its prior 52-week low, after the brokerage predicted “significant writedowns” due to exposure to asset-backed securities, and a Citigroup analyst raised the possibility of resulting bankruptcy. Given such dire prognosticating, it was little surprise to see traders rush to sell off January 12.50 calls, despite the fact that these contracts had lost 62.5% of their value. Volatility trading at lower strikes suggests options traders believe that E*Trade shares are likely to remain at this chthonic level until a new fight for survival in January. Fresh liquidity flowed into the January 5.0 calls, trading 8,000 times to buyers and sellers where open interest prior to today amounted to no more than 250 contracts, while the put side at the same strike attracted buyers and sellers as well. Bought together this combination of call and put is a neutral straddle, betting on either a break below $2.60 or above $7.60 in January. Open interest prior to today showed two calls open for every put.

(COGN) – This morning’s news of IBM’s acquisition of Cognos Inc., Canada’s largest software maker, a market leader in so-called BI (business intelligence) solutions, for $4.9 million, provided a bit of grist for the M&A mill this morning. Shares are 8.3% higher at $57.32, with options trading at more than 4 times the average volume. Nearly all of this morning’s volume is centered in calls in the November contract, with what appears to be profit taking at that month’s 52.50 strike on strength of a more than 118% increase in premiums. Buyers flocked to the November 55 calls, which traded for $2.50 – a 100% increase on the session. Overall open interest shows 4 calls open for every put, and in another vote of investor confidence in Cognos’ outlook under the protective wing of “big blue,” implied volatility dropped a whopping 91% to read just 4.8%. This measures up against the near-48% level of volatility that Cognos’ shares have shown historically.

(NASDAQ:DISH) – Echostar Communications – A near-12% slide for Echostar shares to $42.79 has options moving at nearly 4 times the daily average. Earlier today the company, which rates as the second-largest satellite TV service in the country, reported a shortfall in Q3 subscriber growth. Analysts have suggested that Echostar’s lower-income demographic might be more immediately vulnerable to an economic slowdown, and that such a trend might patch through in subscription rates. On the option front, the 28,600 lots in play are trading with a bias to the calls. High liquidity is noted in the December 50 calls, which traded 5,500 times to the middle of the market at $0.30. It also appears that traders are buying the January 42.50 straddle, which for a combined premium of $7.15 supposes a break above $49.65 or below $35 by January’s expiry. Over the past 52 weeks, Echostar shares have traded as low as $35.16 and as high as $52.54.

VIX - Today’s higher open for stocks left an inverse print on the Volatility Index, which edged 2.7% lower from Friday’s close to read 27.73. With 53,000 options in play ahead of the noon hour, fully one-fifth of the moving volume thus far today is tied up in call buying at the November 35 line, where premiums are down about 22% on the session. Open interest at this strike has swelled by more than 25% over the past week, even as the current delta reading on the November 35 call shows only about a 13% chance that the fear index will make another test past 35. We’ll not venture to comment on the likelihood of another test of this magnitude actually coming to pass, but let it suffice as a comment on the sheer fragility of the market’s gains at the head of the week that it is this level of defensive baggage that VIX traders are lugging about hour-by-hour as the market seeks some level of directional assurance on a light-volume U.S. bank holiday, ahead of a week of heady earnings and headier consumer headwinds.

Source: Monday's Options Report: Citigroup, HRB, E*Trade, Cognos, DISH