By Chris McKhann, analyst at OptionMonster.

Amazon ( AMZN - Get Report) is trading lower on the day, and options action appears to be betting that it won't rise much further.

Amazon had been up as high as $90 in August before plummeting to a low of $34.68 on Nov. 20. It has been in a nice uptrend since then, currently trading at $55.21.

The options action involves a spread using the April 65 and 80 calls, with blocks of 10,000 of each trading within seconds. I initially thought this was a bullish vertical spread, but OptionMonster's systems show that the April 80 calls were bought for $1.34, the high price of the day.

That would indicate that this is actually a credit spread, betting that the stock will not rise above that 65 strike. Supporting this notion further is the fact that, with the stock down 2% on the day, the 80 calls are up in price while the 65s are down.

The April 65 contracts traded for $4.50, so the net credit would have been $3.16 on the $15 spread. A credit spread like this takes a full profit with the stock anywhere below $65. It will lose if shares are above $68.16 and will take a full loss of $11.74 with the stock anywhere above $80.

While probability is on the side of this trade, the risk/reward ratio is significant.


By Jon "DRJ" Najarian, cofounder of OptionMonster.

Elan ( ELN) is seeing extremely heavy options activity as its stock moves higher.

So far today 54,000 calls are trading against 18,000 puts, which amounts to 16 times the average turnover in December, according to OptionMonster's tracking systems. Much of the action is focused on the January 9 calls (ELNAI), where I show blocks as large as 1,192 contracts trading, all on the buy side.

ELN has soared some 70% since hitting its 52-week low of $4.99 on Nov. 21. Today it spiked from $8.20 to $9.10 in just 7 minutes before settling down to the mid-$8 level in midday trading.

Investment bank Leerink Swann issued a positive report about Elan yesterday, but shares in the neuroscience-based biotechnology company may have jumped today because of takeover rumors in the pharmaceuticals industry, which has seen M&A activity recently ahead of JP Morgan's influential health care conference next week.

Materials Select SPDR

By Chris McKhann, analyst at OptionMonster.

The materials sector is having trouble regaining its footing, and today's options action looks for it to falter even more.

The Materials Select SPDR ( XLB)exchange traded fund fell from $46.54 to $18.81 from May to November. It has recovered to $25, but now sits at $23.60, range-bound and unable to break to the upside.

Someone is taking a short-term cheap shot to the downside, buying the January 20 puts. One block of 8,000 went for $0.10 against open interest of 2,559, according to OptionMonster's tracking systems.

Buying this type of short-term, out-of-the-money put is like buying a lottery ticket. One way of using the options "greeks" is to use the delta as a probability that the option expires in the money. The delta of that option is 0.05, giving it a 5% probability of finishing in the money.

The implied volatility of that option is 66%. The 30-day historical volatility is at 55%, while the 10-day is at 30. All of this adds up to this being a lottery ticket, unless this trader knows something about one of the underlying companies.

Monsanto ( MON), DuPont ( DD - Get Report), Dow Chemical ( DOW), Freeport-McMoran ( FCX - Get Report), and Newmont Mining ( NEM - Get Report)together make up roughly 45% of this ETF. Short-term out-of-the-money options are generally favorites for insider trading, though I am NOT saying that that is what this necessarily is.