MER Put Volume Forecasts Chilly December

With the entire financial space representing a corridor of weakness in the market today, the price of contracts to sell shares in Merrill Lynch (MER - commentary - Cramer's Take) are extraordinarily dear, especially given the 6% drop in its share price, to $10.71 (around its 52-week low), since the brokerage's shotgun marriage with Bank of America (BAC - commentary - Cramer's Take) earlier this year. Our attention was grabbed today by its volume, which weighs in at twice the normal level, and the preponderance of puts, which are outstripping calls by more than six to one at present.

What's interesting here is the divergence of views expressed by option traders in the near-expiration November contract vs. December. November $10 puts have attracted heavy action at more than 6 times the open interest (some 30,000 contracts all told), with three-quarters of this volume bought on the offer, which would indicate traders taking a 40-cent credit on the likelihood of Merrill shares staying above $10 between now and Friday. The fact that the volume today is so far and beyond the open interest tells us that these are speculative plays that don't represent the closure or rollout of existing positions at this strike.

Fresh buyers of puts, meanwhile, entered new positions at the December $7.50 strike at about 80 cents per contract, and this on a volume of more than 10,000 contracts, where the open interest numbered less than 1,000 ahead of this morning. Option prices currently reflect a less-than-one-in-five chance that Merrill Lynch will break below $7.50 between now and Dec. 19, but the abundance of buyers shelling out higher-than-normal premiums suggests that this scenario is a possibility worth insuring against in the minds of many options traders.

Implied volatility on all Merrill Lynch contracts ticks in at 166% vs. a 115% level of deviation in the underlying share price over the past year.

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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.