Walgreen’s (WAG) is off 88 cents to $28.95 and down 9.6 percent month-to-date. Implied volatility is up 5.5 percent to 38.5, from about 30 the week before, after a fight erupted between Walgreens and CVS over the two largest drug chain’s pharmacy benefits management arrangement. Walgreen’s announced the decision to end any new drug plans handled by the CVS PBM Network Monday. CVS retaliated Wednesday by saying it will divert more of its patients to its own drug stores. The battle is weighing on WAG shares and options action is picking up as well, with 22K contracts traded so far (55% puts). The action is scattered across a number of strikes and expiration months. The top trade looks like a bearish risk-reversal in the Jun 29 puts – 30 calls, apparently bought at 49 cents, 470X.

Stocks are indicated higher ahead of commentary from Federal Reserve Chairman Ben Bernanke Wednesday. Thirty minutes before the opening bell on Wall Street, stock index futures hint at a 50 or 60-point early gain for the Dow Jones Industrial Average.

Stock index futures rallied along with equity markets across Europe and the euro Wednesday. In midday action, Germany’s DAX is up 1.2 percent, France’s CAC 40 gained 1 percent, and UK’s FTSE rose .5 percent. The euro is up .0044 to 1.2015 against the buck.

The gains in Europe come after the Dow Jones Industrial Average rallied 126 points yesterday and ahead of a testimony on economic conditions from Fed Chairman Ben Bernanke at 10:00 a.m. eastern time. The head of the Federal Reserve is also scheduled to give a speech at an employment conference this afternoon.

Also on the economic front today, the Fed’s Beige Book. The widely-watched qualitative assessment of economic conditions is due at 14:00.

Bonds are modestly lower, as stocks recover and players await news from the Fed. The benchmark ten-year Treasury is down 5/32nd and yields 3.21 percent.

Meanwhile, crude oil is up $1.41 to $73.40 a barrel, but gold lost $11.2 to $1234.40 an ounce.

Among the stocks to watch, Texas Instruments (TXN) is up 2 percent after raising the lower end of its second quarter profit forecast in a mid-quarter update Tuesday afternoon. Take Two (TTWO) gained 4 percent after posting a 34-cent quarterly profit, which was 8 cents better than Street estimates. Potash (POT) and VALE are seeing early strength after UBS upgraded shares to Buy from Neutral. Wal-greens (WAG) lost 1 percent after CVS said it was removing the retailer from its PBM pharmacy network.

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

Rite Aid (RAD) is seeing relative strength and call volume is picking up after UBS said CVS, Wal-green’s (WAG), or Wal-mart (WMT) could have interest in RAD. Shares are up 20 cents to $1.59 and 1495 Jul 2.5 calls traded (75 percent Ask). Another 745 Apr 2.5 calls changed hands (88 percent Ask).

Stocks are indicated modestly higher on a relatively slow news day Monday. Thirty minutes before the opening bell on Wall Street, stock index futures hint at modest early gains for both the Dow Jones Industrial Average and the NASDAQ.

Trading is mixed overseas before the opening bell on Wall Street. While Japan’s Nikkei lost 1.1 percent and Hong Kong’s Hang Seng slipped .6 percent, a .7 percent gain in Germany’s DAX is pacing a modest advance across Europe.

In the US, the economic calendar is light this week until jobless claims and retail sales numbers Thursday.

With little to guide the early action, bonds are lifeless in quiet trading Monday morning. The benchmark ten-year Treasury is down 2/32nd and now yields 3.57 percent.

The dollar edged down .11 to 89.39 against the Japanese yen. The euro gained .0006 to 1.3670 an ounce.

Crude oil is flat near $71.25 a barrel, but gold jumped $14 to $1067 an ounce.

Among the stocks to watch, Hasbro (HAS) and CVS are trading up on earnings news. Some of the fertilizer names, including Potash (POT) and Mosaic (MOS), are seeing early strength. Motorola (MOT) is trading up after being mentioned positively in Barron’s. Home Depot (HD) might help the Dow early after Morgan Stanley upgraded the stock to Overweight.

Note: we had a little Internet issue this morning, which has been resolved. Sorry for any inconvenience this caused.

Some less actively traded names seeing bullish order flow: Wonder Auto Tech (WATG), Cheesecake Factory (CAKE), China Surveillance (CSR) Bearish order flow: Healthnet (HNT), Air Corp. (AAR), iShares Germany (EWG). Post Earnings: Aetna (AET) Pre-Earnings: CVS Ex-Div: American Electric Power (AEP), Exxon Mobile (XOM), Olin (OLN)

Option volume in CVS Caremark spiked to double it’s daily avg as a buyer paid 15 cents for 10000 Aug 30-36 risk reversals on the ISE at 9:45 as shares traded near $33.06. Data shows the trade will open a new position, likely hedging a million shares of stock through August expiry. Earnings due out Feb 8.

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

CVS, which took a 20 percent hit Thursday after the company posted earnings and warned of a disappointing 2010 pharmacy benefits sales period, has been grinding higher and was recently trading near session highs. CVS is up 94 cents to $30.74 and now up 6.5 percent since Thursday. Morgan Stanley said today that Thursday’s sell-off was overdone and said “the co. will be able to fix its marketing problem.” Sentiment in the options market seems a bit more bullish today as well. 42,000 calls and 11,000 puts traded on CVS today. Trading is scattered across Nov, Dec and Jan options with strike prices ranging from 28 to 38. Nov 31 calls are the most actives.