Oracle (ORCL) options are busy (chart.) Interest in the July 20 straddle picked up early in the session. July 21 calls are now the most actives, with 20.5K traded, compared to 17K of existing open interest. The top two trades are 4,680 and 4,133 contracts at the offer for 40 cents, which are possibly closing trades. Nevertheless, sentiment seems somewhat bullish, with 41K calls and 29K puts traded so far. Meanwhile, an implied volatility skew between July and August options hints at a possible earnings gap move of $1.44, or 7.2 percent, when the software giant reports after the closing bell.

Huntsman (HUN) options are active after Credit Suisse and Deutsche Bank settled litigation with HUN. The chemical company alleged fraud and tortious interference related to a terminated merger with Basell and Hexion Chemicals. Both banks decided to settle for $316 million (Link to story.) Some investor might have been looking for more because HUN is down 20 cents to $5.81 (and off 13.5 percent since Cramer highlighted the stock favorably on CNBC on July 15.)

In the options market, volume is running 7X the usual, with 52K traded and call volume representing 75 percent of the activity. Buyers and sellers are both active and implied volatility is down sharply now that event risk has passed, falling to 99 from about 136 Monday.

Investors are showing renewed interest in Ambac Financial (ABK) calls Tuesday. Shares of the debt insurance company are up 3 pennies to $1.05 and options volume is running 25X the normal. Most of the volume is in January 2010 calls at the 2.5 strike. One player bought 17,000 contracts for an average of 27.5 cents. This might close an existing position, as open interest is about 18K. However, 21.3K contracts have now traded total and 83 percent trading ask-side. In addition, implied volatility is up big, to 184 from about 130 the day before.

The action continues late in the day and there have also been several blocks of ABK shares traded Tuesday. The activity hints at possible buy-write or covered call strategies. Recall that, in a buy-write, an investor normally sells 1 call for every 100 shares. If, for example, an investor buys shares for $1.05 and sells the 2.5 call for 25 cents, they are paying 80 cents per share (because the multiplier for an options contract is 100). If so, the downside breakeven is 80 cents per share and the position has upside through the January expiration to $2.50, or 212.50 percent. If shares move above $2.50, the strategist will face assignement and have shares called away at the call option strike price.

For additional recent and “real-time” buy-write examples, click here. For real-time news, buy-write and other options plays, click here.

After rallying 3.18 points Monday, the CBOE Volatility Index (.VIX) is down .28 to 30.88, as the S&P 500 (.SPX) has traded in a relatively narrow 10 point range today. In the options market, VIX July 42.5 calls are the day’s most actively traded contract, with more almost 87K traded.

A lot of that volume is due to ratio spread trading, where a strategist apparently bought 4 July 42 calls for every 1 (short) July 32.5 call. More than 25K July 32.5 calls also traded today. They paid $1 per 1×4, according to a contact on the exchange floor. The position was also tied to VIX futures at 32.6, delta neutral and therefore might not necessarily be a straight bullish bet on the VIX.

Early put buyer in Broadcom (BRCM) today. A trader paid $1.40 for 4600 July 25 puts with shares near $24.58 just 3 minutes into the trading day. Data shows the volume was NOT customer opening, and with nearly 14,000 contracts of open interest in the strike, the purchase may close positions opened earlier this month when a buyer paid $1.30 for nearly 9,000 when shares were near $26.63. With the stock down 7.7 percent since that time, the investor might have decided to close a losing position of short puts and avoid the risk of assignment should BRCM fall to $25 or less by the July expiration.

Put volume spiked in Expedia (EXPE) Tuesday morning. The surge in interest follows chatter that Stansberry Research recommended buying Expedia July 15 puts for up to 95 cents this morning. Nearly 8,000 contracts traded in the past 16 minutes, from 75 to 95 cents, as shares have drifted lower and fall to their lowest levels in four weeks. ISE data confirms mostly customer buying-to-open, largest block was 500 for 80 cents just after 10:07 a.m. when shares were near $15.49.

Arcelor Mittal (MT) is up 86 cents to $31.43 after the company reached an agreement with Brazilian miner Vale to a substantial cut in iron ore prices. A company spokesperson said the cuts were of the “greatest importance”, as iron ore prices falls (Link to story.)

MT shares are up and traders are showing interest in July 40 calls. 2,800 traded and 100 percent of today’s volume hitting offerside, which suggests call buyers are driving the morning action. However, since existing open interest is more than 2,900, it is possible that the early action is closing trades. The contract is 27.3 percent out-of-the-money with 24 days of life remaining.

Knowing when to anticipate assignment is important when writing options and trading spreads. Assignment on many cash indexes only happens at expiration. That is, investors can only exercise “European style” cash index options at expiration (more on index options and settlement). Therefore, early assignment on the S&P 500 Index (.SPX), the CBOE Volatility Index (.VIX) and many (not all) can only happen at expiration.

Stock and ETF options settle “American style” and investors can exercise their contracts at any time prior to expiration. If a contract is in-the-money at expiration, OCC rules dictate that the contract be automatically exercised. Therefore, the strategist should anticipate assignment on any in-the-money options at expiration. If they don’t want to be assigned, they should close the position before the expiration.

Prior to expiration, assignment is less likely if the contract has significant time value remaining. For example, if Wells Fargo is trading for $23 per share and the July 23 call is trading for $1.30 per share, that contract has $1.30 of time value remaining. It is very unlikely that an investor would exercise that contract and call the stock for $23 per share because the time value would then be lost. It would be better to sell the call and buy the stock in the market.

However, as expiration approaches, and or an options contract is deep in-the-money with little or no time value remaining, the chances of assignment increase . If time value falls to a quarter (.25) or less and the strategist really doesn’t want to run the risk of assignment, it is probably better to close the position.

Early indications point to a steady about ahead of housing data Tuesday morning. About forty-five minutes before the opening bell on Wall Street, stock index futures indicate that the Dow Jones Industrial Average might recover 20 or 30 of the 201 points lost the day before.

The latest existing home sales numbers could help set the tone for early trading. Economists expect the latest report, which is due out at 10:00 a.m. eastern time, to show improvement to an annualized rate of 4.82 million homes in May, up from 4.68 million the month before.

Investors will look to the housing numbers and this week’s other data to gauge whether or not Monday’s sell-off was justified. Major averages sank in Europe and the US yesterday after the World Bank said it expects the global economy to shrink by 2.9 percent in 2009, down from its initial reading of -1.7.

The news took a toll on the commodities markets where most of the energy, metals, and agricultural commodities finished with losses Monday. However, crude oil edged up 45 cents to $67.95 Tuesday. Gold gained $2.60 to $923.60 an ounce.

Meanwhile, bonds are holding losses in early pit trading. The benchmark ten-year is down 11/32nd and yields 3.73 percent ahead of an auction of $60 billion in two year notes later today.

The dollar is little changed at 95.77 on the yen. The euro is bouncing back and recaptured the 1.40 level.

Among the stocks to watch, Kroger (KR) is moving higher after reporting quarterly earnings of 66 cents per share, which beat Street estimates by a nickel. PALM is up after Credit Suisse raised earnings estimates and price target. Rambus (RMBS) is under pressure, however, after the chipmaker guided 2nd quarter earnings estimates to the lower end of expectations. Oracle (ORCL) might see action ahead of earnings due out after the closing bell.

Stocks slide on revised economic outlook. VIX spikes. Read More.