Largest trade of the day (and among the top 100 for 2008) involved puts on EMC Corp (EMC, news, chart) trading on the AMEX this morning. A block of 84,000 Jan-09 12.5 Puts were bought for 41cents by a large institutiona customer. This trade was tied to 1.3million shares of stock at $15.55 and may close a large part of the open interest at the strike. On June 10th we saw a block of 60,000 sold on the ISE for 40cents as part of a collar when the stock was near 16.60. In July the stock set a 52w low of 12.06, and has since recovered to current level near $15.09.

Pride Petroleum (PDE, news, chart) is seeing three times its normal trading volume, with 11,000 calls and just 63 puts trading on the day. Most of the volume is in the October calls, where it appears that a player bought a substantial bull call spread by purchasing the 40s for $1.37 and $1.38 a contracts and selling the 45s for 40 cents a contract. With signficant amounts of open interest in both contracts, there is a chance that today’s action is a closing trade. The stock is down $1.51 to $36.90.

The CBOE Volatility Index (.VIX) has strayed from its normal pattern. Stocks are trading broadly higher and the S&P 500 Index (.SPX) is up 13.5 points in midday trading. Yet, the VIX, which normally declines during market rallies, is up .19 to 20.84. The odd behavior of the market’s “fear gauge” is probably due to the fact that, although stocks are moving up, actual levels of volatility remain high. The 60-day statistical volatility of the S&P 500 is 21.4 percent. In addition, the months of September and October are historically volatile months for the US equity markets, which is probably helping to support the VIX as well. Finally, short-term event risk looms with this week’s busy economic calendar concluding with key payroll data on Friday.

Gamestop (GME, news, chart) is seeing active trading. The stock is up $2.23 to $46.10 on no fresh news today. Friday, Businessweek noted that, “Judging from its solid results in its fiscal second quarter ended Aug. 2, it’s doing very well indeed” and, despite the stock’s slump, some bulls “predict that Gamestop’s strong winnings will go on”. In the options market, volume is running 600 percent greater than the the usual for this time of day. Traders are clearly leaning on the bullish side of the trade, with 6,800 GME calls and 1,000 puts trading in the first two hours Tuesday.

Lexmark International (LXK, news, chart) is seeing 6 times normal trading volume on takeover chatter. Shares are trading up 83 cents to $36.80 and 8,400 LXK call options have traded, compared to just 167 puts. The September 40 calls are the most actives. More than 6,000 have traded, with 74 percent trading offerside. Short term speculative call buying also seen in the October 40s and 45s.

Bonds have been ripping higher during the past hour and, after losing 23/32nd early, the benchmark ten-year Treasury bond is back to unchanged. The rally in bonds came after the ISM manufacturing index for August and July construction numbers were released at 10:00 a.m. Eastern time and numbers came up short of analyst estimates. Also, Fannie (FNM) and Freddie (FRE) came off the days highs after Fitch lowered ratings on preferred stock to BBB-. FRE hit a high of $5.23, but is now up 32 cents to $4.83. The major averages also pulled back from the day’s best levels and the Dow, which hit a high of 11,790, is now up 156 points to 11,700.

ViroPharma (VPHM, news, chart) is seeing bearish order flow ahead of a September 4 presentation at the Thomas Weisel Patners Healthcare Conference. With shares down 14 cents to $14.51 in early trading, options volume is already running three times the usual. 3,400 VPHM puts and 1,700 calls have traded. The February 12.5 and 15 puts are the most actives, with roughly 95 percent of today’s volume hitting offerside. Meanwhile, the February 17.5 calls are the third most actives, with 90 percent of today’s volume trading on the bid. Consequently, directional sentiment based on early order flow in VPHM is 90 percent bearish.

Wells Fargo (WFC, news, chart) seeing notable downside hedging activity, with aggressive buyers of the October 22.5 Puts, currently 27% out of the money. Within the first hour of trading more than 10,000 of these puts have traded, priced from 45 to 50 cents, with virtually all trading on the offer and driving implied vols up 6% to more than 80%. Earnings from WFC are expected just before October expiration, suggesting today’s buyers may be setting up for continued volatility in financials.

Airlines are outperforming after crude oil prices fell Tuesday morning. After hitting a low of $105.50, crude is down $6.81 to $108.65 a barrel. Meanwhile, the AMEX Airline Index (.XAL) is up 9.7 percent. Jet Blue (JBLU, news, chart) is helping. Shares are up 46 cents to $6.53 and volume in the options market is running double the usual, with 7,600 calls and 960 puts trading on the day. The September 5 calls are the most actives and seems to be some profit taking. Shares of Jet Blue have more than doubled in less than two months.

Taser (TASR, news, chart) is up 4.5% this morning on takeover chatter. Options activity is well above well above normal levels, with more than 4100 contracts trading, dominated by short-term September 7.5 Call buyers looking to play the move.