Wednesday's Options Outlook: BEAV, XLV, SMH, MER, ORCL, GS, WHR

B/E Aerospace (BEAV) – Two days post-news of a plan to buy Honeywell’s (HON) aerospace distribution unit for just over $1 billion in cash and stock, options in B/E Aerospace are commanding 3 times the normal level of interest. This marks the second time in the past week that B/E Aerospace options have put in an appearance on our “Hot by Options Volume” scanner – last Friday, its options activity showed heavily bearish positioning on 16 times the normal level as implied volatility spiked 20%. With implied volatility hovering around those elevated levels – the 66% reading compares to a 55% historic volatility reading on the stock – option volume shows traders fairly convinced that any meaningful recovery in its shares will be stymied. This was in evidence today in a 6,500-lot bear call spread in the July contract, where the trader sold 30-strike calls for $1.10 against the purchase of calls at the 35-strike for $0.45. The resulting 65-cent credit represents the maximum profit the trader can obtain if both calls expire worthless by July 18.

Health Care Select Sector ETF (XLV) – Shares in XLV, an ETF indexed to a smattering of health care equipment makers, drug makers, biotech and service companies including Johnson & Johnson (JNJ) , Merck (MRK) and Pfizer (PFE), pitched a .87% decline to $30.68 this morning, keeping it just barely above its 52-week low watermark. A 6,000-lot put spread in the front month contract sent option trading volume to 41 times the normal level, where it appears that the trader in this case pared the $1.35 credit on the sale of puts at the 32 strike with the 55-cent purchase of puts at the 31 strike. The residual $0.80 would allow the trader to take in a credit on the transaction while positioning in favor of a pull higher for the XLV that would leave both positions to expire worthless. The total volume involved in this position was equivalent to nearly one quarter of the entire open interest in the XLV.

Semiconductor Holders Trust (SMH) – The outlook is hardly as hale and hearty for the chipmakers, following a decisive cut in the year-end sales growth forecast by Semiconductor Industry Association. The news was predictably impactful on option trading in SMH, which declined 1.8% to $31.03 as option traders speedily put more than 61,400 options in play. It looks like holders of June 33 puts picked today to cash out some positions, given the 24,000-strong volume there selling mostly to the bid at $2.00. Most of the open interest at that strike accumulated in mid-May, when the fetching price ranged from $0.92-$1.22, yielding a tidy profit for traders who timed their transactions accordingly. An expectation of continued price doldrums into the summer was in evidence in heavy put buying at the July 31 line.

Merrill Lynch (MER)  – The news last night out of Merrill Lynch might have made the market think the vulnerable brokerage had dodged a bullet. On Tuesday, a U.S. District Court judge ruled in favor of Merrill Lynch in a dispute with XL Capital Assurance ordering the insurer to stand by $3.1 billion in CDO guarantees for Merrill Lynch that it tried to terminate. A ruling in favor of XL Capital would have left Merrill holding the bag on billions of dollars of exposure to the CDS market. Shares are down 3% to $36.71, and an early spike in implied volatility suggested that option traders were looking for more price turbulence – not less  - from Merrill Lynch as a result. The current 69.7% implied volatility reading suggests 58% more price risk to Merrill shares over the next 30 days, and wit nearly 3 times as many puts trading as calls the posture among option traders appears very defensive indeed. Besides brisk traffic in front-month close-to-the-money puts, we observed possible evidence of put spread activity in the July contract between strikes 30 and 35.

Goldman Sachs (GS) – Options activity in Goldman Sachs is already showing signs of pre-earnings tension, given today’s 14% spike in implied volatility to 51%, suggesting 68% additional price risk to Goldman Sachs shares over the next 30 days (the company reports earnings next Tuesday). Early action suggested heavy buying interest in June 170 calls, where nearly a quarter of the active interest this morning is concentrated. This may be occurring in concert with long strangles involving June puts.

Oracle (ORCL) – With two weeks yet to go before its own earnings announcement, Oracle options are drawing an unusually brisk level of traffic from option traders, with more than 45,000 options active in the first market hour. Shares are down .89% to $22.31, with heavy volume in July 24 calls trading at twice the open interest, selling primarily to the bid. Selling pressure far in excess of open interest was also observed in December 21 puts, at $1.45 per contract. Implied volatility on all Oracle options shows the market pricing in about one-third more risk to Oracle shares over the next 30 days.

Whirlpool (WHR) –   Reports that the world’s largest maker of home appliances, Whirlpool, may pursue a joint venture in a Russian unit of Turkish electronics maker Vestel has occasioned a 2.3% decline in Whirlpool’s share price to $67.46. The attendant spike in option trading volume shows action in out-of-the-money puts at the June and July 60 strikes, most of which is being bought in seeming anticipation of greater pressure on Whirlpool shares over the next month. Implied volatility on all Whirlpool options indicates the market pricing in 25% additional price risk to Whirlpool shares over the next 30 days.

Rebecca Engmann Darst contributed to this report.