With technology stocks on the move again, some options traders were taking shots with

Sun Microsystems

(SUNW) - Get Sunworks, Inc. Report

ahead of the company's after-the-close earnings announcement.

Sun's stock has begun steadily to repair at least some of the damage it suffered last year. Ahead of its earnings report, Sun rose $1.25 to $33.63. Options trading in Sun picked up as the session wore on after a bit of a slow start, according to some market participants. The action in the options, however, appeared mixed overall.

Options-wise, on the

Philadelphia Stock Exchange

, about 7,500 of Sun's January 33 3/4 calls changed hands, rising gained 5/16 ($31.25) to 1 1/4 ($125). Typically, traders buy call options when they are seeking leverage to benefit from a dramatic increase in a stock price.

This week, however, one options market source said a major investment bank has been a heavy seller of call options overall in Sun in the January 32 1/2, 33 3/4 and 35 strikes. The trading may be part of a strategy in which the calls are sold against a long stock position. By selling those call options, the seller is betting that by expiration (tomorrow), Sun shares will be below some of those strike prices. Therefore, those options will expire worthless and the seller will be able to keep much of the premium it took in for selling the calls.

If the stock trades through those strike prices, the shares will be sold at 32 1/2, 33 3/4 and 35, respectively. If those shares were purchased when Sun was trading in a lower range, the gains could be worth exiting the stock at this point. If Sun disappoints, then the premium taken in for selling the calls is seen as partially offsetting losses in an underlying stock position.

On Thursday, the January 37 1/2 puts were seeing a lot of volume on the

Chicago Board Options Exchange

, with about 13,700 contracts trading. The puts fell 5/8 ($62.50) to 3 7/8 ($387.50).

A put option gives the purchaser the right, but not the obligation to sell a security for a specified price by a certain date.

Sun is expected to earn 16 cents a share for its fiscal second quarter, according to the 19-analyst

First Call/Thomson Financial

consensus estimate. A seven-analyst First Call estimate projects that Sun will post revenue of $5.29 billion in the quarter.

Overall in the market, the day's theme was selling February options, as traders try to take advantage of the juicy premiums in the contracts, according to one options trader at a big firm. The trader said "everyone" was selling options "with



Arguably, the primary reason for the higher premiums is that the level of implied volatility is high in many options. Implied volatility is a key factor in an option's price and an indicator of uncertainty in the direction of the underlying security. Implied volatility generally rises in earnings season, especially in the less-certain market conditions currently prevailing.

One option a lot of market watchers keep an eye on and trade heavily, the

Nasdaq 100 Unit Trust

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, is now trading around a key level at 65, notes options firm

Schaeffer's Investment Research

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In a research note Wednesday afternoon, Todd Salamone of Schaeffer's pointed out that 65 is the QQQ's 10-week moving average and it hasn't closed above that trendline on a weekly closing basis since early September. Also, he wrote that the 65 area has marked a resistance level since mid-December and earlier in January for the QQQ. He asks, "Will short-term traders view the QQQ's recent flirtation with this level as another shorting opportunity?"

So far on Thursday, the QQQ was up $1 to $64.88.

Open interest in the QQQ January 65 calls was 44,000 contracts. Salamone wrote that the sellers of those January 65 calls "would love to see the QQQs close below this strike price on Friday expiration."

Trading in the January 65 calls wasn't dramatic Thursday. The calls rose 3/16 ($18.75) to 1 1/16 ($106.25) on volume of 3,000 contracts on the

American Stock Exchange



International Securities Exchange

said Wednesday the

Securities and Exchange Commission

approved its payment for the order flow fee program last week. The ISE said that the SEC's go-ahead is "the first time such a plan was approved by the SEC ... following a public comment period."

The ISE said the way it went about gaining adoption of its plan differed from the method pursued by other exchanges because their rivals' payment for order flow programs "were submitted as fee schedule revisions that were deemed approved upon filing." The levy on ISE market makers is 75 cents a contract.

Payment for order flow is the practice of options specialists and market makers paying brokerage and order routing firms for their orders. When options contracts began being listed on multiple exchanges in 1999, competition among market makers for order flow increased sharply. In addition, multiple listing narrowed spreads between bid and offer prices, cutting into market makers' profits. So they looked for ways to make that up and payment-for-order flow sprang forth.

As market makers began to pay for order flow, other market makers, and in some cases firms who were staunchly against to the practice, decided to start paying for orders to stay competitive.

As the practice increased among market makers, last summer, options exchanges began assessing payment-for-order-flow fees on market makers, taking an administrative role of sorts over payment for order flow.

As part of a plan to implement a screen-based trading system this year, the Amex said this week it reached a deal to purchase electronic trading technology for its options and equity business from

OM Technology

, the firm that also provides the all-electronic ISE's central exchange system and trading stations.

Other traditional floor-based options exchanges have plans for electronic trading systems. The CBOE has set a target date of April 1 to launch its electronic trading system,


. The

Pacific Exchange

has said its screen-based trading system, which is being undertaken with Australian firm


, may be launched in the first half of the year.

The options exchanges are setting up screen-based trading systems in case the market someday moves entirely away from floor-based trading to all-electronic trading.