In the last hour of trading today, the stock market is solidly higher. Earnings are sparse this week and economic news will probably be the primary driver of market action. Today, the ISM manufacturing index was at 57 in December, its 17th straight monthly increase. Separate data showed construction spending up .4 percent in November, about twice as much as expected. Factory orders and auto/truck sales are due tomorrow before the Federal Reserve concludes its latest meeting on interest rates Tuesday afternoon. Meanwhile, Bank of America (NYSE: BAC) is leading the Dow on news of a settlement with Freddie Mac and Fannie Mae. Alcoa (NYSE: AA) is also helping the industrial average on an analyst upgrade.

The Dow closed up about 93 points and the NASDAQ added nearly 39 points. Heading into the final hour, the CBOE Volatility Index (VIX) lost .33 to 17.42. Options action is picking up from the very low levels seen during the final week of 2010. About 8.5 million calls and 5.6 million puts traded so far.

Bullish Flow
Alcoa shares are up 41 cents to $15.93 and options volume is 2.5 times its daily average after Deutsche Bank upgraded shares of the aluminum maker to Buy. About an hour before the close 81,000 calls and 36,000 puts had traded. Overall sentiment seems mixed. The top trade is 2525 Alcoa April 16 Calls on the $1.21 bid. The Alcoa Jan 16 Calls are the most actives with 25,400 traded (39% bid, 53% ask). The Alcoa Jan 14 Puts are busy as well with 10,740 traded (22% bid, 69% ask). Implied volatility is up 6% to 36, as investors set their sites on earnings. Alcoa unofficially kicks off the fourth quarter reporting season next Monday (after market).

Yahoo (NASDAQ: YHOO) adds 12 cents to $16.75 and a block of 17,000 Yahoo Jan 17.5 Calls bought at 27 cents was tied to 1.7 million shares at $16.75 and possibly exits a buy-write. Open interest in the Jan 17.5 calls is 183,300, currently the biggest open interest position in Yahoo. Going into the last hour today 24,198 contracts had traded.

Bearish Flow
United States Natural Gas Fund (NYSE: UNG) added 32 cents to $6.31 and it looks like some investors expect shares to run out of fuel in the weeks ahead, as the Feb 5 – 6 put spread is being bought today, with 5,500 trading at 25 cents. More than 30,000 in total have traded. Meanwhile, Jan 6 and Jan 7 calls have both traded more than 20,000 times and might be liquidating trades. Most of the action has been in smaller lots and open interest is sufficient to cover in both contracts.

Implied Volatility Mover
Bearish activity detected in Xilinx Inc. (NASDAQ: XLNX), an hour before the close with 6,344 puts trading, or two times the recent average daily put volume in the stock. Shares have added 47 cents to $29.45 and 4,230 June 23 puts have changed hands. Implied volatility is up 3.5% to 27.5. It might be a play on earnings, due January 19 (after market).

This article is by Frederic Ruffy, the Senior Options Strategist at Whatstrading.com, a site dedicated to helping traders make sense of the complex and fragmented nature of listed options trading.