Some players in the options market strangled the iShares Emerging Markets Fund (EEM) for a second time this week. On Monday, we saw interest in the EEM March 40/35 strangle. Today, attention turned to the December contracts. At 12:25 Eastern time, an order of 2,500 December 42 calls traded offerside for $3.20 a contract on the PHLX. The same number of 38 puts traded offerside for $1.65 a contract at the same time.

With open interest of 562 and 8 in these two contracts, respectively, the action seems to be opening trades. In addition, with the fund trading up 83 cents to $42.52, this strangle is a play on possible volatility in the fund, but also with a bullish bias. That is, it will make money faster if the ETF moves higher rather than lower. The EEM is a fund that holds a basket of companies from various emerging markets including China, Brazil, and Taiwan. Nearly 40 percent of the constituents are either energy or basic material companies. 17.5 percent are financials.

The Select Sector Consumer Discretionary Fund (XLY) saw six times its normal trading volume on active trading in the August and September 28 put options. The August 28s saw 33,900 contracts, compared to open interest of 37,102. The Septembers saw 24,300 contracts traded, compared to open interest of 2,878. The heavy volume is perhaps rolling of a protective position ahead of next week’s expiration. That is, with most of the volume in the August contracts trading bidside and blocks of Septembers trading offerside, an investor might be closing the front month and buying a similar position in the next one. Or, it could possibly be a calendar spread (offsetting the cost of buying Septembers by selling some August premium), where the strategist expects XLY to stay above $78 over the next seven trading sessions and then begin to fall.

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The CBOE Volatility Index (.VIX) is down 1.09 to 20.05 and briefly made a run below 20 for the first time since late May after the major averages were able to shake off early weakness and build on Tuesday’s big gains. After a 36-point rally Tuesday, the S&P 500 Index (.SPX) is up 3.3 points heading into the final 30 minutes of trade. Most of today’s gains in the equity markets came in afternoon trading as crude oil faltered once again. Crude is down 87 cents to $118.30 and hit three month lows of $117.11 a barrel midday. Bonds recovered some losses, but the benchmark ten-year Treasury closed down 4/32nd, keeping its yield just above 4 percent. Gold is little changed at $886.6 an ounce. VIX is testing the 20 level ahead of earnings from AIG after the closing bell and weekly claims, July retail sales numbers, and pending home sales Thursday morning.

St. Jude Medical (STJ, news, chart) is seeing bullish order flow. The stock sits unchanged at $47.50 a share and 6,500 calls have traded on the day, compared to 2,400 puts. 3,100 of the October 50 calls traded, with 85 percent trading offerside. Another 2,600 of the September 50s traded, with 82 percent hitting on the offer. St. Jude Medical announced today that it has received Japanese approval for its Durata next generation high voltage difibrillator lead. No other news today. Earnings due out in mid October.

Large call-spread against a put sale traded on PHLX, very similar to that executed in XTO earlier today. CHK October 50-60 Call spread was bought 20,000x for 2.20, versus a sale of 14,000 Oct 40 Puts at 2.30, tied to stock at 45.50. Sources suggest both of these trades may have been ’stock replacement’ strategies, in which the intiator liquidates a larges stock holding in favor of an options position with a more complex payoff profile.

Hershey’s (HSY, news, chart) is seeing bullish order flow. The stock is up $1.41 to $39.01 on no obvious news. In the options market, volume is running seven times the usual, with 8,000 calls and 300 puts trading on the day. The August 40 calls are the most actives, with 3,800 contracts trading offerside. Buying is also being seen in the September 40s, August 45s, and September 45s, as players seem to be positioning for a rally in HSY in the short-term.

Overstock.com (OSTK, news, chart) calls are active on dubious chatter that Amazon.com (AMZN) might be eyeing the company. Shares are up 17 cents to $20.06 and 5,275 OSTK calls have traded, compared to 792 puts. The August 22.5s, which come off the board a week from Friday, are the most actives. 3,975 contracts have traded, with 65 percent of today’s volume trading offerside.

Freeport McMoran (FCX, news, chart) is seeing double its normal options trading volume. The stock is up $7.95 to $86.95 after it was added to Citigroup’s Top Picks Live. In addition, Bloomberg was out with a report this morning noting that RIO is looking for acquisitions in the copper and coal industry amid slowing profit growth due to falling nickel prices. RIO raised $12.06 billion last month in a stock sale for takeovers and expansion, according to CEO Roger Agnelli. In June, JP Morgan said FCX is the most likely acquisition target for RIO. In the options market, traders are leaning on the bullish side as FCX climbs higher. 84,000 calls have traded, compared to 28,000 puts.

Virgin Media (VMED, news, chart) is seeing bullish order flow in midday action. The company is due to report earnigns tomorrow morning (3:00 a.m. Eastern time). Options volume is running four times the usual and directional sentiment based on the flow is 95 percent bullish ahead of the news.
The stock is down 17 cents to $11.17 and 8,300 VMED calls have traded, compared to 150 put options. The December 12.5 calls are seeing the bulk of the volume, with 7,900 contracts traded and 97 percent trading offerside. With open interest of only 336 contracts, the activity hints at speculative call buying in anticipation of a post earnings rally in VMED.

Merck (MRK, news, chart) is seeing double its normal trading volume on what appears to be calendar spread trading. With shares trading up 48 cents to $35.18, an order of 41,000 September 35 puts traded offerside for $1.65 a contract on the PHLX. At the same time, 41,000 of the August 35 puts traded bidside for 60 cents a contract. Sources on the exchange tell us the action was part of September/August 35 spread for a debit of $1.05 per contract. If so, the strategist might be anticipating that Merck can hold above $35.00 a share between now and August options expiration (7.5 trading days) and possibly move lower from that point forward.