Option Traders Cocoon in Caterpillar's Downside Spread

Continuing a trend that began on Friday, contracts to sell shares in Discover Financial Services (DFS - commentary - Cramer's Take) are active today, sending overall volume to nearly three times the norm. Shares are down 1.4% at $11.66 on the eve of a Merrill Lynch (MER - commentary - Cramer's Take) banking and financial services event at which the credit card issuer's CEO is due to speak.

While Friday's option market showed traders looking to enter long positions at the $7.50 put strike in November and January (some 42% of Discover's open interest is situated in January puts at the 12.50 strike and below), today's most active contract is the $10 put, where April and November contracts are drawing action from buyers and sellers.

Elsewhere in the financials, shares in Northeast regional savings and loan People's United Financial (PBCT - commentary - Cramer's Take) rose 7.7% to $17.96 following news that it would replace Unisys (UIS - commentary - Cramer's Take) on the S&P 500.

We should note that the model portfolio holds November $17.50 calls in People's, and while today's upside in share price has brought those contracts into the money, the premium value of the calls remains less than the asking price on the day the position was entered -- the cold comfort of high-volatility times! That hasn't deferred other option traders from seizing the moment to enter new positions in People's Financial today, driving volume to seven times the normal level, more than half of which is bullishly inclined. Taking a lesson, perhaps, from our own relative lack of reward in paying out money for $17.50 calls, traders today appear to be selling November $17.50 puts, drawing a credit on a similar wager of shares remaining above the $17.50 line into expiration.

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At the time of publication, Darst had no positions in the stocks mentioned.

Rebecca Engmann Darst is the Portfolio Manager for TheStreet.com?s Options Alerts Portfolio newsletter and an equity options analyst for RealMoney Each Thursday at 6:30 a.m. EST, she delivers the early-morning lowdown on option volume and sector trends on CNBC's "Squawk Box." Prior to her work in the equity options market, she spent seven years in Scandinavia as a Copenhagen-based chief reporter for a European Commission news service, correspondent for Spanish daily El Mundo and Radio Netherlands, followed by stints at Nordea Bank and Saxo Bank.