Citigroup Inc. (NYSE: C) -- options active at flat implied volatility; C rallies on Lampert position. C is recently up $1.91 to $54.69. ESL Investments, a hedge fund run by Edward Lampert, holds a 10.9 million stake in C. C call option volume of 46,723 contracts compares to put volume of 12,012 contracts. C June option implied volatility of 18 is near its 26-week average according to Track Data, suggesting non-directional risks.

Foundation Coal Holdings (NYSE: FCL) -- puts active as FCL sells off on Concerns. FCL, a coal producer with 14 mines, sold 73.9 million tons of coal in 2006. FCL is recently down $1.47 to $41.13 on rumors circulating FCL will receive a lawsuit from the Federal Government for violations of the Clean Water Act. FCL call option volume of 153 contracts compares to put volume of 3,856 contracts. FCL June option implied volatility of 39 is near its 26-week average of 38; however above a level of 32 from earlier in the week according to Track Data, suggesting the options are pricing in larger risks.

Option volume leaders today are: Amgen Inc. (NASDAQ: AMGN), EnCana Corp. (NYSE: ECA), Apple Inc. (NASDAQ: APPL) and Citigroup Inc. (NYSE: C).

Daily Option Update is provided by Stock Options Specialist Paul Foster of theflyonthewall.com.

MAJOR PAPERS:

• New York State Attorney General Andrew Cuomo has filed a suit accusing Dell Inc (NASDAQ: DELL) and affiliate Dell Financial Services of deceiving consumers, including fraud, false advertising and deceptive business practices, to increase computer sales, reported the Wall Street Journal (subscription required).
• Alan Greenspan signed Allianz's (NYSE: AZ) Pacific Investment Management, known as Pimco, as his first economic consultant client, according to the Wall Street Journal.
• Barron's Online's (subscription required) "Inside Scoop" column reported that Blue Nile Inc (NASDAQ: NILE) CEO Mark Vadon sold 250,000 shares and CFO Diance Irvine sold 40,000 shares, with InsiderScore.com's Ben Silverman advising caution on Blue Nile due to the selling.
• The Financial Times (subscription required) reported that Citigroup Inc (NYSE: C) shares rose sharply in after-hours trading yesterday after Edward Lampert, the hedge fund manager who controls Sears Holdings Corporation (NASDAQ: SHLD), disclosed he had acquired an $800M stake in Citigroup.

WEBSITES:

• TechCrunch.com reported, citing two sources with knowledge of the deal, that News Corporation's (NYSE: NWS) MySpace will acquire Flektor for a price in the $10M-$20M range.

With Eddie Lampert's Sears Holdings (NYSE: SHLD) being pressured to bring in the profits after the recent merger with Kmart, will the company report stellar earnings and revenues next Thursday when its Q3 numbers are due?

Whatever they may be, rumor has it on The Street today that Sears Holdings Corp. may be interested in acquiring Pleasanton, CA-based Safeway, Inc. (NYSE:SWY) in a merger of department stores and grocery retailers. Say what?

Although financier Lampert is known for purchasing assets he feels are undervalued, a merger between Sears and Safeway would be on odd case study indeed to dissect. Analysts on the Street indicated that a deal like this could be worth $20 billion.

Lampert even went as far as to say "Our strong financial position and cash flow generation provide us with the flexibility to capitalize on a wide range of market opportunities as they arise ... we are prepared to invest substantial amounts of capital if we identify other attractive investment opportunities." Hmm, that smells rather generic but also suspicious. In addition to a possible buyout of Safeway, the Chicago Sun Times reported yesterday that Sears could also be considering San Francisco-based Gap, Inc. (NYSE:GPS), Home Depot Inc. (NYSE:HD) and Anheuser Busch Cos. (NYSE:BUD).

With the grocery business having notoriously thin margins, most likely any company except Safeway would be a better bet. But Sears and Home Depot? Okay, let me close my eyes and imagine that for a second.