*Scanning all single-stocks subject to 2500 contracts minimum call or put volume

Hartford (HIG) continues to move higher ahead of its July 29 earnings report adding another 5.5%to $15.85 today and up some 30% in the past week. Option volume is 3x daily average in across the board repositioning. In the front month August $13 calls have traded 5,000 contracts between 2.90-3.20 with 75% of volume at the bid in what looks like rolling up from the open interest that built last week to 9,900 when stock was around $12 and calls were trading 60-70c. Fresh positions are being open in the August $16,17 and $18 which have volume exceeding prior open interest in two way trading. On the put side fresh buying in the August $14p and the Jan. $7.50/10 was spread 5,000 x in what looks like a roll up.

*Scanning all single-stocks subject to 2500 contracts minimum call or put volume

Hawaiian Holdings (HA) shares are up 4% to $6.95 ahead of the airline’s earnings report after today’s close and option volume is running 6x the daily average with four leg call spread accounting for all the volume in what looks like a general roll up. The transaction saw the August $5/$7.5 spread trade 1,200 times accompanied by the purchase of 1,200 of the October $7.50 in opening transactions. The October $5 calls have traded 3,800 contracts at the bid of $2.20 in what appears to be a closing of a purchase made June 19 when the stock was $5.30 and the calls were trading around $1.25 a contract.

Mylan Labs (MYL) is down $1.41 and put options are active after the Pittsburg Post-Gazette reported that employees routinely overrode computer-generated warnings about possible problems with medications Mylan was producing. The article cites a confidential internal report obtained by the Pittsburg Post-Gazette. Shares are down and players are bracing for additional downside with MYL Oct 10, Jan2010 10 and Jan2010 7.5 puts. Implied volatility is up to 43, from about 41.5 late Friday.

Stock index futures point to a flat open Monday, as investors react to mixed earnings news and await a report on new home sales. Thirty minutes before the opening bell on Wall Street, stock index futures indicate that both the Dow Jones Industrial Average and the NASDAQ will open the session little changed.

A busy week of earnings news started on a mixed note. Dow component Verizon (VZ) shares rose 1 percent after the company reported quarterly earnings of 63 cents per share, which was in-line with analyst estimates.

However, Aetna (AET) is under pressure after the insurance company reported a 68-cent per share profit for the most recent quarter, which was 10 cents below analyst estimates. AET also guided estimates lower for the fiscal year. Shares are off 10 percent.

Amgen (AMGN) might see action ahead of earnings, after the closing bell today.

Some of the commodity-related names might see early strength after crude oil gained 45 cents to $68.50 a barrel and gold added $4.2 to $957.30 an ounce.

Meanwhile, bonds are under pressure ahead of new home sales data, due out at 10:00 a.m. eastern time. Economists expect the report to show modest improvement, to an annual rate of 352K homes in June, up from 342K the month before.

The benchmark ten-year Treasury is down 21/32nd and yields 3.74 percent.

The dollar gained .41 to 95.16 on the yen. The euro moved up .0046 to 1.4263 on the buck.

Earnings and economic data will drive trading in the week ahead. Read More.

To some market watchers, the recent decline in the CBOE Volatility Index (.VIX) is a sign of investor optimism, bullishness and even complacency. After all, VIX is the market’s “fear gauge” and a measure of investor sentiment. Friday, the index closed at 23.09 and its lowest levels in almost 10 months. It is well below the extremes near 100 seen in the fall of 2008. So, are the new lows from the volatility index cause for concern? Is there too much bullishness and complacency in the equity market today?

While extreme readings from the VIX often signal overbought or oversold market conditions, the latest decline also reflects a change in actual volatility. The CBOE Volatility Index tracks the expected volatility priced into S&P 500 Index (.SPX) options and it is not only a gauge of sentiment. It also reflects the daily price swings of the S&P 500. Today, for example, the 20-day historical volatility (based on closing prices over the past 20 days) of the S&P 500 is only 22 percent–which is below the recent readings of the VIX and also well below the extremes in the mid-80s seen at the peak of the market debacle of 2008.

Since VIX is a measure of volatility, when it reaches extremes, it sometimes makes sense to look at other sentiment indicators to determine if sentiment is really overly bullish or bearish. Right now, for example, Investors Intelligence reports that 36.7 percent of those surveyed are bullish and 35.6 percent are bearish. Meanwhile, the American Association of Individual Investors reports that only 37.6 percent of those surveyed are bullish and 42.4 percent are bearish. These two sentiment surveys aren’t consistent with extreme bullishness.

The reliable International Securities Exchange Sentiment Index [ISEE] hasn’t produced any extreme readings either. ISEE is a unique index created by the International Securities Exchange. It tracks daily call buying divided by put buying (X100) for all trading on the ISE (sales are ignored). During periods of extreme optimism, when investors are leaning heavily on the call side of the trade, ISEE will spike above 200. The chart below, available on iseoptions.com, shows that the last meaningful spike in the index was on March 9. The ten-day average (not on the chart) is 118 and not consistent with over zealousness or overbought market conditions.

ISEE (source: iseoptions.com)

Fund flows are not consistent with extreme bullishness. According to AMG Data, investors added $5.1 billion to stock funds during the month of June and a whopping $38.6 billion during the second quarter. The pace has slowed over the past few weeks: $673 million outflows in the first week of July, followed by $1.1 billion of outflows, and then $193 million in inflows last week. Mutual fund investors are not bullish, but have been net sellers in July (until last week.)

But do all these “sentiment indicators” really matter???

After the market crash of 2008, investor confidence had been lost. Pessimism reached an extreme and, only once some confidence had been restored, could the equity market begin to move higher. Beginning in March 2009, falling levels of negativity and increasing optimism turned into a self-feeding cycle that has now sent the S&P 500 up almost 45 percent since spring 2009 lows. That powerful trend remains intact and could continue until sentiment has reached the other extreme–of bullishness and optimism. Judging by the sentiment surveys, ISEE and fund flows, investor sentiment has not yet reached the bullish extreme.

Importantly, the historically volatile months of September and October are fast approaching and, as Steven Sears points out in the latest Barron’s Striking Price. “traders expect Volatility to come back tanned, rested and ready to shake up the stock market this fall.” If so, the few weeks ahead could offer an opportunity to buy cheaper options–as VIX and implied volatility sit near 9-month lows–and create interesting risk-reward trades like strangles, ratio backspreads, and selective put buying on sectors or stocks that are most vulnerable should volatility spike in the fall 2009. Check the blog for unusual bearish activity and track the “smart money” trades to find opportunities. Get more frequent updates and ideas by subscribing to WhatsTrading.com Premium.