Stocks slide for a second day. VIX closes up 1.87 to 32.68. Read More.

Microsoft (MSFT) has seen a day of active trading Tuesday. Shares of the software giant are up .6 percent to $23.54 and the best percentage gainer in the Dow Jones Industrial Average after Jefferies analysts recommended investors buy shares. The firm says investors should get in now and ahead of what is likely to be a large and rapid PC upgrade cycle starting in late 2010 (Link to story.) Some investors appear to agree, as January 2010 calls at the $30 strike are the most actives. 151K calls and 92K puts traded total. Implied volatility is heading to 34, from about 32.5 Monday.

Savient (SVNT) is halted. Reuters is reporting that an FDA panel has recommended for approval Krystexxa for gout. Shares were down a penny to $9.26 ahead of the decision. Implied volatility remains elevated at 204, but down from 270 seen late last week. SVNT rallied 56.4% Friday in anticipation of a positive decision and open interest in Savient calls has been building over recent weeks as well (Chart.)

Triple Witching Day is the third Friday in March, June, September and December, which tends to see heavy volume, as it is the last trading day before the quarterly expirations of stock options, index options, and futures. In recent years, “quadruple witch” has come to replace the term “triple witch” because the newer single stock futures also cease trading at that time. June 19 is the next “witching” expiration and might help explain some of the volatility seen in the equity market Monday and Tuesday.

Put volume spiked in Urban Outfitters (URBN) Tuesday. 54,000 contracts traded, compared to a meager 750 calls . Most of the activity is in the January 2010 15 – 30 put spread, as an investor is apparently using today’s decline in the share price to close out a bearish spread opened on July 22, 2008. The retailer is down 98 cents to $20.13 and the spread traded 26500X for $8.85. Looks like it was opened on July 22 for $4.70 when URB was around $32. The trade was discussed here and makes an excellent case-study for those looking for a real-world example of a longer-term bearish put spread.

Summer doldrums? Not everyone thinks so. The CBOE Volatility Index (.VIX) is up .07 to 30.88 and VIX August 50 call option is the most actively traded index contract Tuesday. One player bought 25K for 75 cents (against a smaller position in VIX futures.) Two other blocks (10K and 8,800) were also bought this morning for 75 cents. Looks like some investors are looking for a substantial increase in volatility by the August expiration and are buying the August 50s. The contract is 61.9 percent out-of-the-money. and so it would take a substantial spike in the VIX for these calls to make a profit at the August expiration (63 days). Keep in mind, however, that summer months don’t always translate into less volatility. Notice the nearby chart (click to enlarge.). July has been a seasonally strong period for the CBOE Volatility Index. Two years ago, VIX nearly tripled from mid-June to mid-August.

Bearish traders are active in storage device maker Western Digital Tuesday. Put volume is running 30x the normal, with 11,000 traded vs. 1.000 call options. Order flow analysis indicates that customers are buying to open positions in July 22.5 puts and paying 65 to 85 cents. Shares are slightly lower near $24.50. Earnings expected after July expiry, so buyers may be positioning for preannoucement or some other downside catalyst in WDC.

US Natural Gas Fund (UNG) rallied up to $16.26 per share Tuesday morning and was recently up 17 cents to $15.88. Natural gas rallied 32 cents to $4.18 Monday and is gained 4 cents to $4.22. In the options market, players have been showing a lot of interest in UNG calls recently and the action continues Tuesday. 57,000 traded, compared to 31,000 puts. The top trades include 5000 July 15 – Oct 18 call spreads on the ISE, which appear to be a roll of a bullish position from one month to the next.

Stocks are set to rebound with help from better economic data and rebounding commodities prices. Forty-five minutes before the opening bell on Wall Street, stock index futures indicate that the Dow Jones Industrial Average might recapture 30 or 40 of the 187 points lost the day before.

Stock index futures edged higher after a report showed housing starts increasing to an annualized rate of 532,000 homes in May, which was up from 454,000 the month before and better than economist forecasts of 485,000.

Building permits, a better gauge of future activity, rose to 518,000 from 494,000. Economists had expected an increase of 14,000.

Meanwhile, a separate report on inflation came in well below estimates. The Labor Department reports that its Producer Price Index [PPI] edged up .2 percent in May, which follows a .3 percent increase the month before and falls well below economist forecasts of .3 percent. Excluding food and energy, the core PPI fell .1 percent. Economists were looking for a .1 percent increase.

Stock index futures extended morning gains on the heels of the data. Bonds are under water. The benchmark ten-year Treasury is off 12/32nd and yields 3.76 percent.

The dollar gave back some of Monday’s gains, falling .63 to 97 against the yen. The euro gained .014 to 1.3915 on the buck.

Dollar weakness is helping support higher crude and oil prices. Gold gained $10 to 4937.50 an ounce. Crude is up $1.70 to $72.32 a barrel.

Among the stocks to watch, Best Buy (BBY) is down 3 percent after reporting quarterly earnings of 42 cents per share, which beat by 8 cents, but revenues fell short of expectations. Sprint Nextel (S) is higher after Research in Motion (RIMM) unveiled a new Blackberry Tour smart phone available from Sprint. Adobe (ADBE) might see action ahead of earnings after the bell. FedEx (FDX) and Morgan Stanley (MS) are expected to report tomorrow.