Procter & Gamble (PG, news, chart) puts saw action on spread trading Thurday. PG fell $1.09 to $65.48 amid a sell off in the broader market. Meanwhile, a player stepped in to a 1 x 2 ratio spread in midday trading. Shortly after 11:00 a.m. Eastern time, an order of 4,250 PG September 65 puts traded offerside for $1.22 a contract on the ISE. At the same time, two orders for 4,250 of the September 62.5 puts traded bidside or for 53 and 54 cents a contract.

The trading activity occured with less than 2,000 contract of open interest. Therefore, the action appears to be opening trades. it also seems to be part of a substantial bearish 1 x 2 ratio spread on PG and one that will yield its best results if the stock settles at the lower strike ($62.50 a share at expiration). The profit zone is between $60.50 and $65.00 a share with substantial losses possible if shares nosedive. There was nothing new on PG Thursday. Earnings due out Tuesday before the bell.

Onyx Pharmaceuticals (ONXX, news, chart) saw action during Thursday’s biotech rally. ONXX is another biotech name considered by some observers to be a possible acquisition target. So, it should come as no surprise that, after two deals were announced in the sector in less than two weeks, the stock is moving higher on hopes it might be next. For example, on April 23, 2008, shares ran higher on talks Bayer, which partnered to launch Nexavar, might be looking at ONXX. On Thursday, shares of the biotech company rose $3.68 to $40.50 and, in the options market, trading was brisk (four times normal), with 20,000 ONXX calls and 3,400 puts trading on the day.

Some of that volume can be traced back to spread trading. To be specific, shortly after 11:30 Eastern time, 2,700 of the August 50 calls traded offerside for 20 cents a contract. Meanwhile, 1,800 of the August 45 calls traded bidside for 50 cents a contract. The action has all of the hallmarks of a 3 x 2 ratio backspread. If so, the strategist is taking in a credit of .10 per spread, which s/he keeps if ONXX stays below $45.00 a share between now and August options expiration (11 trading days). A move higher and the risk graphs gets ugly fast, with big losses possible between $45.90 and $60.00 a share. Should the stock go through the roof and move significantly above $60.00, however, the trade begins to perform well.

Xerox (XRX, news, chart) saw unusual trading Thursday. The stock rsoe 50 cents to $13.64 and volume in the options market ran 13 times the normal. Sentiment tilted to the bearish side, as 18,000 puts and 10,000 calls traded on the day. The August 14 puts were the most actives. More than 10,000 contracts traded, compared to open interest of just 258 contacts. With 90 percent of that volume trading on the offer, it seems that some players are buying puts in anticipation of some short-term weakness in XRX. Meanwhile, the January 15 calls were the second most actives, with 6,778 contracts traded. The volume included a block of 5,000 contracts that were sold for .57 early in the trading session. The only news on the day is that director Charles Prince bought 10,000 shares at $13.44, which seems to have sparked gains in the shares, but certainly wouldn’t explain today’s defensive trading in Xerox. Earnings were released on the 24th. XRX is up roughly 3 percent since that time.

The CBOE Volatility Index (.VIX) is up 1.24 to session highs of 22.45 as stocks faltered heading into the closing bell. The Dow Jones Industrials have given back 200 of the two-day 450-point rally. The stage was set for some early morning selling after the GDP data came in short of economist forecasts and the latest weekly jobless claims report showed a big uptick in lost jobs heading into Friday’s key payroll data. Merger news from the biotech sector and another slide in crude oil (down $2.77 to $124.00 a barrel) failed to give investor sentiment much of lift midday. Then things unraveled during the final hour of trade. Consequently, although the NASDAQ sits little changed on the day, the Dow and S&P are sporting sizeable losses. Bonds are higher for a second day, with the benchmark ten-year Treasury running higher on this morning’s poor data. The ten-year is up nearly a point, bringing its yield back down to 3.98 percent. The buck faltered, back towards 1.56 on the euro and 107.84 on the yen. Meanwhile, the bid returned to gold, where the price of an ounce rose $11.6 to $914.50.

Weyerhaeuser (WY, news, chart) is seeing bullish order flow. The stock is up $1.77 to $52.52 amid general strength in the forest and paper products sector. The group got a lift early after International Paper (IP) reported second quarter earnings of 56 cents a share, which was 17 cents better than analyst estimates. IP is up $2.87 to $28.19 and not far from session highs ($28.30). Bullish sentiment seems to have infected WY as well. The stock is up $1.83 to $52.58 and volume in the options market is running three times the usual. Calls are dominating trading, with 7,600 contracts traded, compared to 2,000 puts. The September 55 and 60 calls have seen a flurry of activity in recent trade, as some players seem to be taking bullish trades on WY heading into an earnings report due out Tuesday before the opening bell.

JC Penney (JCP, news, chart) is seeing some bearish put spread trading Thursday. With shares trading down 12 cents to $31.23, 10,000 of the September 25 puts and 5,000 of the September 30 puts have traded. The activity appears to be part of a substantial 1 x 2 ratio spread. Just before 14:30 Eastern time, 4,851 of the January 30 puts traded offerside or for $4.00 a contract. At the same time, twice as many (9,702) of the January 25s traded midmarket for $2.00 a contract.

With open interest of 1,603 and 2,691, respectively, the activity has the hallmarks of an opening of a bearish spread. That is, the strategist is buying the 30s and selling twice as many 25s. By getting into the trade at even, there is no upside risk, but profits are substantial if JCP closes at $25.00 share at January expiration. The profit range is between $30 and $20, with significant losses possible if the stock really tanks.

The top trade in the US equity market Thursday is an order of 50,000 of the Citigroup (C, news, chart) September 15 puts that traded along with 20,000 September 20 puts. Sources on the PHLX, where the trades happened earlier today, tell us that a customer bought the 15s for .54 cents and sold the 20s for $2.35. The action seems to be part of a substantial ratio spread, which would represent a bet that Citi shares will drift lower and possibly settle near $15.00 by September options expiration. The profit zone for this ratio spread is between, roughly, $12.50 and $19.00. C was trading at $18.56 at that time.

AK Steel (AKS, news, chart) is seeing increasing volume for a second time this week. Tuesday, 41,000 AKS calls and 20,000 puts traded on the day. Today, volume is running three times the usual, with 45,000 calls and 23,000 puts trading on the day. The stock is up $5.50 to $64.85 on takeover talk. FT Mergermarket reports today that the steelmaker is in talks with multiple parties and is interested in an all cash transaction. According to the report, sources familiar with the matter told dealReporter, “although the company is not running a formal sale process, ‘it’s bankers are teasing the crowd with a very unrealistic price tag.’ ThyssenKrupp and Evrav have been taking a close look at AK, he said”.

Earlier today we noted that put volume and implied volatility in Dendreon (DNDN) were on the rise ahead of next week’s earnings. See 12:10 comment. Since that time, some DNDN strangle buyers have surfaced. At approximately 12:30 Eastern time, an order of 11,400 November 12.5 calls traded offerside for $1.20 a contract and the same number of November 2.5 puts traded offerside for 30 cents a contract. Open interest in the two contracts is 5,837 and 2,413 contracts, respectively. In additoin, total volume in both is mroe than 20,000 contracts. To make a long story short, it seems that some players are aggressively opening long strangles in anticipation of increasing volatility in DNDN between now and November options expiration.

Dendreon (DNDN, news, chart) implied volatility (IV) is moving higher. In the August 5 puts, for example, implied volatility is moving into the triple digits, up roughly 20 percent on the day. The increase comes amid two days of increasing volume in the DNDN January put options. Yesterday, 25,170 of the January 7.5s traded. Today, the January 5 puts are the most actives, with more than 12,000 contracts traded. The reason for the increase in put volume is unclear, but on July 23rd, the company said it expects Interim data analysis from a phase 3 Provenge Impact trial in October. IV in the August options might be heading higher ahead of an earnings report due out over the next two weeks.