Fifth Third (FITB, news, chart) saw bullish order flow Friday. Shares were trading up 48 cents to $15.83 heading into the closing bell. FITB saw strength early in the day after Ladenburg Thalmann analysts said the Ohio bank might be a possible merger partner with BB&T (BBT). Although the company’s CEO was on CNBC Friday afternoon saying that his bank is not in discussions with BBT, the merger hopes seemed to inspire some bullish trading in options on Fifth Third. 3,665 FITB calls traded on the day, compared to 1,245 puts. The September 17.5s saw the most volume. 1,382 contracts traded, with 95 percent of the day’s volume hitting on the offer. Buying picked up in the January 20 and September 15 calls as well.

The CBOE Volatility Index (.VIX) is up 1.02 to 20.45 and not far from session highs (20.51), as risk perceptions rise aheaad of the three-day break. With 15 minutes left to trade, the S&P 500 Index (.SPX) is down 15 points from yesterday’s levels and off 7 points on the week. The VIX is higher as actual levels of volatility have not yet subsided. The 20-day statistical volatility of the S&P 500 is near 23 percent. Just as important, investors are bracing for event risk next week. Although the earnings calendar doesn’t hold much market moving potential, investors are understandably a bit more cautious amid the uncertainty from Hurricane Gustav as well as a busy economic calendar next week, which concludes with key payroll data on Friday. Consequently, trading is cautious and players are taking money off the table. Stocks, bonds, gold are down. Crude drifted back to unchanged. VIX is higher going into the historically volatile months of September and October.

Large customized calendar spread in CBS (CBS, news, chart) options on the PHLX today involving listed and flex-style contracts. With the stock trading near $16.41, an institutional customer bought 50,000 20 strike calls with a custom expiry date of Aug 24th, 2010 against a sale of 50,000 listed Jan-10 20 calls, paying a net debit of 87.5 cents per spread. This appears to roll a large ongoing long out-of-the-money call position which last surfaced in March, when the stock was near $22.85. 52 week low of $15.76 was set Aug 4, and todays flow suggests one large player is willing to commit to a long postion nearly 2 years out.

Ford Motor (F, news, chart) calls are active ahead of key events early next week. Shares are up 14 cents to $4.57 and 77,000 Ford call options have traded, compared to less than 6,000 puts. The September and October calls with the 5 strike are the most actives. 33,400 of the Septembers and 31,200 of the Octobers have traded. With open interest of 51,294 in the Septembers and 9,914 in the Octobers, today’s volume might be the rolling of bullish calls from one month to the next. There certainly seems to be some opening buys in the Octobers, as the top trade in those contracts was an order for 18,153 traded on the offer or 35 cents a contract at 13:45 Eastern time on the AMEX. The action comes ahead of Ford US August sales results due out at 13:00 on September 3 and a presentation at the Credit Suisse Global Automotive Conference at 11:15 on the September 4.

Wells Fargo (WFC, news, chart) options activity is straying from its recent pattern. Over the past few weeks, sentiment has been bearish towards the bank, with increasing put volume and bearish spread trades seen on more than one occassion. Today, however, the October 34 calls are the most actives. With WFC down 3 cents to $30.40 a share, 16,500 contracts have traded, with 97 percent of that volume trading offerside. Open interest is 1,270 contracts, suggesting opening buy orders and possibly speculative call purchases on hopes for a rally in shares of Wells Fargo.

Lehman Brothers (LEH, news, chart) is making a run to session highs in recent trade. The stock is up 38 cents to $16.25 and not far from its best levels of the day and the week ($16.33). The move seemed to gather some momentum around 11:00 Eastern time (which, in terestingly, also coincided with a spike in the ten-year Treasury and a lift in the S&P 500 off session lows). A jump in options volume happened at the same time. Shortly after 11:00, a player bought 20,000 of the January 16/22.5 bull call spreads and also sold the same number of January 10 puts. The trade is substantial and is similar to others we have seen in recent days. It all seems to be very bullish trading in the options of the battered brokerage firm.

Ponder oil prices, slowing growth, recession

LSI Logic (LSI, news, chart) is seeing bullish order flow ahead of a presentation at the Kaufman Brothers Technology Conference, which begins on September 3 and lasts through the 5th. Shares are trading down 37 cents to $6.69 amid a broader decline in the technology sector Friday. In the options market, volume in LSI is running 4 times the usual. 8,400 calls and 3,900 puts have traded so far. The October 7.5 calls and the January 7.5 calls are among the most actives. More than 7,500 have traded combined, with less than 1 percent of today’s volume trading offerside. At the same time, another 3,350 October 7.5 puts traded, with 95 percent htting on the offer. Therefore, there seems to be premium buying in both puts and calls, but with traders leaning a little bit more on the bullish side Friday. Implied volatility is up 7 percent and moving to the mid 40s.

General Motors (GM, news, chart) is leading the Dow Jones Industrial Average lower Friday morning. While all 30 components are lower, GM is the worst performer following news the automaker is recalling 857,000 vehicles for electrical problems. Shares fell 30 cents, or 3 percent, to $10.04. In the options market, 26,000 GM puts and 10,000 calls have traded today. The top three trades include a block of 10,000 GM January 7.5 puts traded bidside for $1.22 a contract, a block of 5,000 January 10 puts for $2.38 (bid offer $2.35 – $2.40) and 5,000 of the January 5 puts for 54 cents (bid offer 52 to 56 cents).

With large amounts of open interest in all three contracts, the trades might be closing transactions. It is more likely, however, that the volume represents a substantial butterfly spread on GM. If so, the strategist is selling 2 of the 7.5s for every purchase of 10s and 5s. If so, they paid 48 cents per fly and have a potential profit of $2.02 if GM settles at $7.50 per share at expiration. The profit range is between $5.50 and $9.50, with the debit at risk (48 cents) if the stock falls outside of the profit range at January options expiration.

H&R Block (HRB, news, chart) calls are active. Shares hit a high of $25.80 and its best levels in almost four years early Friday. Sentiment in the options market seems mostly bullish as well. Total volume is running 7 times the usual, with 13,000 HRB calls and only 112 puts trading on the day. Most of the activity is in the April 30 and January 25 calls. In the former, 6,067 contracts have traded, compared to open interest of 10,327. In the latter, 6,400 contracts traded, compared to open interest of 1,374. So, it is possible that the uptick in volume is due to closing of the Januarys and opening of the Aprils. In any case, it seems to be bullish position in the company and comes ahead of an earnings report due out September 3 after the closing bell.