Legg Mason (LM) options volume was 5X average Friday due to 1 large bearish risk reversal for 5,500 contracts in August. The trader sold the August $35 calls and bought the August $25 puts for a net debit of $0.30, shares at $30, betting on at least a 16% fall in shares in coming months. Shares formed a potential double top around $34 and financial reform could hurt results going forward. The asset manager trades at a PEG of 3 and 0.85X book value. Shares are already trading near most Street targets, so downgrades could occur. The Company recently announced the successor to Bill Miller, a legend, so there could be some loss of faith in the Company and clients could move elsewhere. April AUM (Assets Under Management) was $685.3B, no growth from the prior month.

Waters Corp (WAT) was mentioned intraday Wednesday, with unusual call action and it continued throughout the day with shares closing near highs, up 1.6% while IV spiked 13% higher. More than 6,600 calls traded, which is 35X average, and comes after the recent takeover of Millipore has many thinking Waters could be next as a filtration play. The March 65/70 and April 70 calls attracted buyers, mostly offer side on the 100+ contract orders. Shares trade 15.4X earnings and 18.8X cash flow. The recent breakout has shares eyeing a move to 2008 highs around $70, although a takeover would likely fetch a 25% or more premium.

Norfolk Southern (NSC) is often considered the best managed rail company, but the stock is not at 52 week highs like it’s counterparts Union Pacific (UNP) and Kansas City Southern (KSU). That could change with a break of $55, which would target a move to $60. Option traders were decisively bullish Tuesday, with 4,425 calls trading, 3X average, and 90% offer side buys. The April and June $55 calls both saw buyers, with 2,800 in April $55’s changed hands. Shares trade 13.2X earnings and 18X cash value, and recently were raised to Overweight at Barclays with a $62 target. Recent improvements in pricing, shipping volumes, and improved outlook for coal were cited as reasons for the upgrade.

Quest Diagnostics (DGX) had a large straddle sell at 3:15pm Tuesday, as 2,000 March 55 straddles were sold for $3.25, believing shares are trapped between $51.75 and $58.25 through March. That puts shares between a gap as resistance and a double bottom support level, so a fairly high probability trade, although the value is not all that great as IV is already depressed at 22%, near 52 week lows. At a fair valuation of 12X earnings and 13.5X cash flow, and no near term catalysts, the trade might make some sense.

Genzyme (GENZ) trader takes a bullish bet as shares trade for $55 Tuesday, and the trade was done twice, 2,500 contracts each. In this trade, the strategist sold April $47.50 puts at 65 cents and bought the April $60 calls at $1.05 in bullish risk reversals. Shares were hanging around the 200 day EMA and are breaking out of a bullish flag today, and also out of a longer term downtrend. Earnings are scheduled for 2/17 and large cap Biotech stocks have done well so far this earnings season with Gilead (GILD) and Amgen (AMGN) reporting solid forecasts. Genzyme has a PDUFA date set for June 17th for Lumizyme in Pompe disease. This trader may be looking for an early response from the FDA or is just playing the technical strength.

Foster Wheeler (FWLT) traded around 1,200 March $35/$30 bullish risk reversals Wednesday, costless trades (paying $1.15 on the calls and collecting $1.15 on puts.) Shares are re-testing a bullish channel breakout at $32, and also bounced off the 20 day EMA. There is substantial upside potential in the heavy construction Company’s shares that trade 12.7X earnings, PEG of 0.83, and 0.78X sales. Wunderlich put a Buy and $39 target on shares back on January 15th. Foster Wheeler engineers everything from wind farms to power plants, and is expected to benefit from stimulus dollars.

Humana (HUM) February $48 calls traded more than 6,000 contracts Wednesday, as bullish action continued in the healthcare names. Shares were at $45.56 when the trades hit, and closed at $47. HUM is in a sharp trend higher and have some resistance at $50 and then a major gap from 53.65 to 62.37. Humana is one of the best valued at 8.8X earnings, PEG of 0.7, 6.4X cash flow, and 1.1X cash value. There was also bullish action in Wellpoint (WLP) February $65 calls with new opening buyers and 3,100+ trading on the day, offer side buyers. Bullish bets continue to come into the healthcare plan stocks that trade at some of the best values in the market, and clarity coming soon as to the details of the healthcare bill.

Merck (MRK) with a large trade Thursday, as 10,000 of the April $40 calls are sold and 10,000 of the January 2011 $40 calls are bought for a $1.04 calendar call spread. There has also been the sale of around 10,000 February $40 calls today, so the move higher may be slow, but looking for Merck to be above $40 next year, and look for volatility to come down. Shares have been consolidating above the 200 week EMA and do appear to have upside potential to $45 over time. At 10.8X earnings and with a 4% dividend yield, Merck seems to be a strong play for 2010.

Lubrizol (LZ) call volume rose to 5X average Wednesday, with offer side buyers on wide spreads in both the February $75 and $80 calls, the uppermost strike. Lubrizol is set to report earnings on February 4th, and unusual call buying has been seen before big pops in the stock a couple times this year. The specialty chemical producer trades 10X cash flow and 4.6X cash value. Lubrizol is an ultimate play on the economic rebound with manufacturing activity picking up, as it’s additives are used by industrial firms, and it also provides additives to the oil industry. The chart shows an ascending triangle breakout to new highs.

22,000 calls traded on Peabody Energy (BTU) yesterday, more than 3X average daily volume, and the action in February with earnings set for 1/27. The February $50 and $55 OTM calls saw big block buys, with 8,000+ of the more than 10% OTM $55 calls being bought. Shares are trading at $49.40 with implied volatility up 15% to 47%, and Peabody is seen as a big player in the China coal boom which is very hot right now as economic data shows continued explosive growth in China and a strong appetite for commodities. Shares are not a bad value at 13.5X cash flow, and the breakout to 52 week highs today should target at least the channel top at $52.50.