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Rebecca Engmann Darst contributed to this report.

Merck (MRK) – Yesterday’s move by Merck and Schering-Plough (SGP) to postpone their earnings releases pending the release of some very discouraging clinical data on storied cholesterol drug Vytorin led investors to chasten the latter drug company much more virulently than the former. This puzzled us for much of the day yesterday, but it seems the downside quickly caught up with Merck after the company withheld its year-end earnings guidance and trimmed projected sales for two of its core drugs, Gardasil and Singulair. The news led to a smattering of analyst downgrades, and with that in mind we see Merck shares down 10.5% to $31.63 – crashing below the 52-week low and rewarding traders who were long of volatility heading into the earnings report (August options were pricing in about a $8 move on back of the numbers as of yesterday, so we can see with benefit of hindsight that long straddles and strangles were a relative bargain). The question on option traders’ lips this morning appears to be whether a move below $30 is overdone for Merck, and that drama has played out at the August 30 put line more than 26,500 times today. While relatively more of these August positions have sold to the bid, we noted fresh buying interest one month ahead at the September 30 put line, where more than 7,700 lots have traded today at $1.20 apiece – a position that requires another 8% more downside between now and September 19. Option traders currently see a slightly better than 1-in-3 chance of that happening.

SanDisk (SNDK) – Speaking of orgiastic selloffs, shares in SanDisk lost a quarter of their value this morning to read $13.63 after an earnings thunderclap that brought with it a torrential drop in sales revenues and a 10% rise in cost of product revenue, hardly helped by what the company’s CEO called a “rapid deterioration in consumer confidence.” Citigroup, which has been vocally bearish on Sandisk since at least mid-June due to anticipated “demand erosion,” immediately cut their rating on Sandisk shares to “sell” and said in a note to clients that they were “throwing in the towel” its shares for the duration of 2008. Implied volatility on all Sandisk options has come off about 12% since yesterday but at 69.9% remains stubbornly elevated above the 60.9% historic reading on Sandisk stock. This suggests that a heightened risk premium to Sandisk price levels is still being factored into its option premiums. We see brisk two-way traffic in excess of open interest at the August 12.50 and 15 call strikes, but also heavy buying pressure at higher premiums and ballooning implied volatility on the put side at strikes 10, 12.50 and 15.

Texas Instruments (TXN) – Earnings doldrums extended to chipmaker Texas Instruments, which offered slightly softer-than-expected Q2 numbers but killjoy guidance for Q3 – and that was the rub for traders, who sent shares down 16% to $23.97 today. The options market was so taken aback by the miss that implied volatility on its options actually rose 14.5% this morning – after the numbers were out. This reading has since come off a bit but at 40.6% shows a slight risk of yet more turbulence being priced into the coming month (the historic volatility reading on Texas Instruments shares is 38.2%). August volume shows calls and puts at the 22.50 and 25 strikes trading with a fairly even split to buyers and sellers well in excess of open interest at all strikes – suggesting that traders aren’t just closing out pre-earnings volatility positions but playing speculatively on the likelihood of near-term stabilization in Texas Instruments’ price. Buyers appear keen to accumulate fresh longs in September 22.50 puts, however, suggesting further erosion into the fall, in line with Texas Instruments’ dour forecast.

Molson-Coors (NYSE:TAP) – Many market observers have speculated in recent weeks that the digestion of the Anheuser-Busch/InBev deal will create a short-term opportunity for Molson-Coors and its joint venture with SABMiller.  But the distraction may not last long, and in the longer term, some say Anheuser Busch-InBev is likely to represent incredible cost pressure to Molson Coors in an environment of already high-and-rising oil and hops prices for beer producers. With that in mind, shares in Molson-Coors are up 1.5% to $56.92 today as we observe a boost in options trading volume to 4.7 times the normal level. This appeared what looks like a short October call spread between strikes 60 and 65 involving 3,600 lots. The trader in this instance sold the lower-strike, closer-to-the-money call for $2.80 and bought the 65-strike call for $1.35, taking a credit of $1.45 on a wager that Molson-Coors shares will remain below $60 by October 17.

GTx Inc. (GTXI) – Shares in GTx Inc., a Tennessee-based biotech company that develops molecules that strategically modulate the effects of estrogens and androgens connected with cancer and osteoporosis, are up 5% at $18.47 today on no apparent news catalyst. An increase in options trading volume to 7.3 times the normal level appeared in the form of a trader buying a 3,500 lot position in August 17.50 calls for $1.25, and possibly defraying part of this transaction by writing 3,500 lots at the September 15 puts strike for 40 cents. The takeaway here is that the trader isn’t expecting a drop below 15 in connection with GTX Inc’s August 5 earnings report. 

Standard-Pacific Corp. (NYSE:SPF)For a second consecutive session we’re seeing heightened option trading interest in Standard Pacific, as shares read 1.7% lower at $4.07. This morning’s increase in option trading volume to 6 times the normal level appears in the form of pair of fresh put spreads at the 7.50 and 10 strikes in the August and September contracts involving about 2,390 contracts at each strike, but the volume has since expanded to show far higher volumes at the deep-in-the-money 10 strike.  Implied volatility at 106.3% shows a dramatic elevation above the 83.2% historic reading on Standard-Pacific stock.

Brocade Communications (NASDAQ:BRCD)Shares dropped 16.5% to $6.90 on news of its takeover bid of Foundry Networks (FDRY) – a move that some analysts have tipped as a bid to take on Cisco (NASDAQ:CSCO) in the network equipment space. The move was accompanied by a healthy 37.5% spike in implied volatility, as traders looked to 6.0-strike puts in the October and particularly the January contracts, driving overall volume to about 2 times the normal level.  

XLF – Finally, a check on the always-liquid Financial Select Sector SPDR. Shares reversed early gains on back of Wachovia earnings and now read 1.6% at $21.08, holding ground firmly above the $20 threshold. Since our first early morning check of the markets, we’ve seen some mammoth volumes go through in August calls at the 17, 19 and 21 strikes, with the 19 and 21 strikes appearing to sell to the bid on volume in blocks of 48,000 lots and 162,000 lots respectively. We have no read as yet as to whether this volume was traded together. Implied volatility in the XLF continues to sink, however, at 48.6% it remains below the 51.86% historic reading on XLF stock, which speaks to some measure of fear resolution at least inasmuch as the depositary institutions are concerned. And at least one trader banked on that with a good old-fashioned 5,000-lot call spread in the January contract between strikes 20 and 25, paying a $1.84 debit on a bet that XLF shares will trade within a $3.16 range above current levels heading into the New Year.

Source: Tuesday Options Update: MRK, SNDK, TXN, TAP, GTXI, SPF, BRCD, XLF