Retailers saw a lot of options action Wednesday after Macy's (M) fell 8% after reporting quarterly results, and Wal-Mart (WMT) announced it expects a difficult holiday shopping season. The names with the action will all report earnings this week, including JC Penney (JCP), Wal-Mart and Nordstrom (JWN).

JC Penney's puts are active ahead of 11/13 earnings after Macy's shares got hit on earnings, a close competitor. At 11:46 am, 3,000 December $28 puts were bought and 3,000 December $27 puts were sold in an apparent bearish spread. But there was also a trade of 3,000 December $30 puts at $0.90, below the bid. Shares broek down intraday and the action looks bearish in the options pits. 4X average put volume has traded already.

This week will prove to be an important week for the Semiconductors (SMH), a group that has shown leadership through much of the rally. This week we will see earnings from a few key names including ASML Holding (ASML), Xilinx (XLNX), Altera (ALTR), Intel (INTC), Linear Tech (LLTC), Fairchild Semi (FCS), Advanced Micro (AMD), and Cypress Semi (CY).

It could prove to be a challenge beating investor expectations this quarter after many of the firms raised guidance back in early September (SkyWorks (SWKS), Texas Instruments (TXN), MicroChip (MCHP), Xilinx, and Altera), and with shares trading at 52 week highs for many of the semiconductors, we could see profit taking post-earnings.

As merger Monday approaches I thought it would be fitting to look for some potential small cap takeovers in technology, where M&A has been hot recently, and the probability for deals is very high considering 11 of the top technology firms (Cisco (CSCO), Hewlett Packard (HPQ), EMC, Google (GOOG), Microsoft (MSFT), Qualcomm (QCOM), Apple (AAPL), IBM, etc.) have a combined $260 billion for a shopping spree.

The first stage of the recovery for these firms was done via cost-cutting initiatives, but as demand still lags the pace of recent years these companies will look to acquisitions for growth, as organic growth options are minimal, and also make acquisitions to optimize operational practices.

Below are a few of the most interesting trades that took place in the options market on Wednesday September 30th, 2009.

I not only provide what the action was that traded, but also the most likely reasoning behind the approach and what it means for shares.

I recently have been noting the strength in regional banks, often tracked via the ETF KRE, which has closed higher for 8 straight sessions. The weekly chart shows a triangle setting up that could result in a breakout at $21, and lead to a massive short squeeze that sends this ETF 50% higher to $31.50.

After a quick scan of the most shorted regional banks the following list came up, and a simple view of the charts shows the massive short squeeze underway. The following names are the most shorted regional banks with bullish chart patterns: PVTB, FMBI, WTFC, CBU, TRST, CVBF, EWBC, WABC, UMPQ, SIVB, BXS, IBOC, and PRSP. Many of these names have a short ratio of more than 12 days to cover, and more than 20% of the float.

Sometimes the classification of stocks is very misleading by the main sources of stock information on the internet. However, I have come across three stocks that are great growth at a reasonable valuation plays, while having bullish technical patterns.

While one is listed in the financial sector, one in technology, and one in healthcare, the stocks should all be listed under the healthcare heading.

Stocks that are lesser known offer many of the best investment opportunities as people fail to accurately price the security, and lack of Analyst coverage on the Street does not pin any valuation price target.

However, simple valuation metrics compared to industry and market averages allow any investor to find disconnects to take advantage of as a longer term investment.

Maxim Integrated (MXIM) saw a large institutional size trade yesterday at 1:10pm on the Phillix that was the exact same trade as one seen at 11:43am on the ISE. At 11:43am a trader bought 2,000 of the August $17.50 calls for $0.58 and sold 1,000 of the August $15 puts for $0.71. At 1:10pm a trader bought 3,000 of the August $17.50 calls and sold 1,500 of the August $15 puts.

These bullish ratio reversal spread trades are looking for a move higher in shares of the Broad Line Semiconductor. In late April MXIM reported better than expected earnings and guided for a strong Q4. Maxim has the ability to charge higher prices as it operates in the Analog space, and customizes designs, so it is less susceptible to pricing worries. Analog chips also have very high margins, and the mini energy efficient chips are being used in a variety of mobile devices.

Drug and biotech stocks have underperformed in the recent market rally, but recent high profile investor conferences and positive FDA announcements have the group buzzing once again. Mergers and acquisitions have been in focus, and investors are always trying to find the next target.

I recommend looking to foreign soil for the next potential biotech acquisition, which is further backed up by recent comments by Pfizer (PFE) saying it is looking for acquisitions in emerging markets and the Middle East.

Mueller Industries (MLI) is a leading manufacturer of copper, aluminum, and plastic parts for the plumbing, refrigeration, and air conditioning industries.

Buckingham is the only Wall Street firm covering the company, which makes it the type of hidden value play that often goes unnoticed by investors, and there has not been any Analyst activity in over three years.

Grocery store stocks do not receive a lot of coverage in the market, and have underperformed in the recent rally for the most part. This trend is likely to continue as rising commodity costs crimp margins and hurt earnings across the board, while a few should be able to gain market share and set apart from the rest.

Although food is a necessity in any economic condition, consumer spending is a major determinant in the quantity bought, as well as where shoppers head. Less traditional grocers such as WalMart (WMT) and Target (TGT) will continue to put pressure on the conventional grocery stores that are unable to compete on a pricing basis. Also, the bulk distributors such as CostCo (COST) and BJ’s Wholesale (BJ) are also a going concern for the traditional grocers.

One of the greatest assets you can have as a trader or investor is having the ability to spot trends, and use that information to draw conclusions about what will occur in the future.

I have long used the options market as a way of watching where the “smart money” is making bets. It has allowed me to foresee the collapse of financial stocks and the re-emergence of oil and commodity related stocks.

As the market has climbed 40% the last few months, my fundamental stock screen named “Diamonds in the Rough” now only returns 2 results, down from the 15 or so from February. One of these is TeleTech (TTEC), an outsourcing services company that focuses on customer management and enterprise management solutions.

As companies continue to cut operational costs in order to be more efficient and profitable, outsourcing is a strategy that has a bright future. The closing of call centers by Sprint (S) was seen as a major hurdle, but shares have recovered as other business opportunities provide a consistent revenue stream, and the company’s earnings power is underestimated.

Orthovita (VITA) is a stock on the move as shares have gained 35% in the past two weeks and shares volume has exploded to more than 4 million weekly shares, as compared to an average of just 1.2 million in the 13 preceding weeks.

The company develops medical devices for the fusion, regeneration, and fixation of human bone, such as bone graft substitutes and bone strengthening polymers. Orthovita currently has four key commercial product platforms: Vitoss Bone Graft Substitute, Vitagel Surgical Hemostat, Cortoss Synthetic Cortical Bone, and Imbibe Delivery and Disposable Systems. It’s most promising products are most closely related to spinal surgeries.

Cantel Medical (CMN) came across my screen early this morning when I noticed the company will be reporting earnings today. Cantel provides infection prevention and control products for the healthcare market, including water purification, sterilization products, face masks, and more. Cantel is the type of well positioned small cap in a growing niche market that I like to invest in, and it recently promoted a new CEO, so this could be a nice turnaround story.

Cantel shares are up around 50% this year, but still trade at half the price of Summer 2005 levels. The shares are exhibiting a bullish flag breakout pattern that implies a move to $24, and possibly further. Shares formed this flag and broke out above its 200 week moving average, and also trades above its 200 day EMA.

Mineral Technologies (MTX) has a market cap of $765 million as a producer of specialty mineral products used in the products such as paper, building materials, paint, glass, food, and pharmaceutical industries. Its main product lines are: world leading provider of PCC to paper industry; one of world’s leading developers of refractory materials for coating surfaces to resist extreme heat; and mining and producing calcium carbonate and talc which have a variety of industrial applications.

Shares trade 14.6X forward earnings, 0.73X sales, 6.25X free cash flow, and the balance sheet is almost free of debt, while having nearly $11 per share in cash on the books. The company is priced cheaper by most metrics when compared to other synthetic material companies, and also is growing earnings faster than its peers, and 46% of sales come from outside the US.

Hawkins Inc (HWKN) is a basic materials wholesaler, distributing bulk and specialty chemicals in the United States. It operates in the water treatment, industrial, and pharmaceutical segments. Many of its products are used to improve the environment, which is a key area of focus in the new presidential administration, so it is fair to say that demand for Hawkins’ products will continue to be strong.

Hawkins has a market cap of just $194 million while recording sales of $274 million last year. Although small caps generally are placed into the “risky” asset class, Hawkins has a beta of 0.45, less than half as volatile as the broader markets, and the company yields a 2.75% dividend while maintaining a clean balance sheet with zero debt.

There are two major ETFs that focus on the Regional Banks, the KRE and the RKH, and two of the largest option trades in recent memory (based on contract size) took doomsday-like bets against the group today.

The first trade came at 1:48pm when a 74,900 contract purchase of the June $17.50 puts in the KRE took the offer of $0.35, a $2,621,500 bet against the ETF that requires approximately a 19% move lower for the trader to break even by the third Friday in June. The KRE fell 2.17% into the close following that massive trade, but more interesting is the amount of volume that traded in the 15 minutes, that equaled nearly 50% of the entire day’s volume pressuring the KRE to close at the lows of the day. For technicians out there, the KRE also broke below its 20 and 50 day exponential moving averages.

I recently came across a new offering from Market Vector Funds, the Indonesia Index (IDX), and after doing some research I began to really like the prospects with the emerging economy. Portfolios looking to diversify some holdings into an emerging market will have a tough time finding a better place to invest for the future.

The IDX sector breakdown is as follows: 29% Financials, 20% Energy, 17% Materials, 12% Consumer Staples, 7% Consumer Discretionary, 6% Telecom, 6% Utility, and 3% Industrials. More than 50% of the companies are considered mid-cap, with 41.8% large cap. The PE Ratio for the fund is around 13, which is extremely cheap considering the growth prospects as compared to comparable industries in other countries.

The recent rally in the markets has been criticized by most as a typical bear market rally, while even the longer term bulls feel that a pullback is necessary for the health of the markets.

Valuations have begun to become overly bullish considering the collapse in fiscal year 2009 earnings estimates for the S&P 500 components, and technical indicators are all signaling that momentum is fading and we are due for a sell off.