Option activity Tuesday has been focused on earnings and a possible cancellation of a much anticipated merger. The CBOE Market Volatility Index (VIX), which is based on the implied volatility of the S&P 500 options and is used as a gauge for fear in the market, was recently up 1.64% to 14.91. The CBOE Nasdaq Volatility Index (VXN), which measures the implied volatility of the Nasdaq 100, was recently up 0.43% to 16.29. Options of health care stock Guidant ( GDT) were extremely active as traders speculated that its merger with Johnson & Johnson ( JNJ) might not go through. Shares of Guidant plummeted more than 10% after J&J's Chief Financial Officer Robert Darretta said the company would consider "alternatives under the merger agreement" during its postearnings conference call. In reaction, speculators began selling calls and buying puts in Guidant options. The October 70 calls have traded 39,300 times; the open interest for the strike coming into today was 176,835 contracts. The sellers of these calls are not anticipating the merger to take place. They could have sold the calls to collect income as the stock slid or could have used the proceeds of the sale to purchase puts. Guidant would need a significant move up by Friday's expiration in order for these calls to be considered in the money. The October 75 calls have traded 8,000 times. The October 65 puts have traded 34,000 times. The buyer of puts is expecting GDT stock to trade below $65 a share by Friday. The November 70 and 75 calls have traded a total of 30,000 contracts while the November 65 puts have traded 13,000 times. A bulk of the trading has taken place in the October and November options. The outer-month options have been less active because of the longer-term uncertainty with the merger. It looks like traders are not anticipating the merger to go through by November expiration, which is Nov. 18. Shares of Guidant were recently lower by $7.63, or 10.5%, to $64.75.