Do you trade gold options? Do you trade S&P options? Are you trading long term options (LEAPs?) If you do, you would be using the Chicago Board of Options Exchange (CBOE).

The CBOE may be following in the footsteps of the Chicago Board of Trade (CBOT), the International Stock Exchange (ISE) and the New York Mercantile Exchange (NYMEX), which have all gone public, The Financial Times cites sources.

We are back riding the bull today in commodities. The dollar is down with the March futures contract trading at 77.89, down 0.33.

Crude oil is trading at a high of $81.16 per barrel in the February West Texas contract, up $1.64. Brent crude is up $1.70 to $77.63 per barrel.

The metals are higher with LME (London Metals Exchange) copper up 1.3% to $7,525 per ton, triggered by a strike at a copper mine in northern Chile.

First of all, let's look at what hedging really is. Take, for example, a farmer who grows corn. He knows that his cost for growing corn is, say, $3.00 per bushel. But he doesn't know what price the price of bushel of corn will be come harvest time. He looks at the September futures contract for corn and sees that the price is $3.30 per bushel.

To guarantee that he will get $3.30 at harvest time, he sells September corn contracts equal to his crop (each corn contract equals 5,000 bushels). When harvest time comes he delivers his corn to the appropriate delivery point designated by the Chicago Board of Trade exchange (CBOT) where the contracts are traded. It should be noted that if the price of the futures contract goes above $3.30 per bushel, the farmer may be called for margin money until he makes delivery, at which time his account is settled out.

Agrium (NYSE: AGU) volatility is flat as AGU at record high on strong fertilizer demand. AGU, an agricultural retailer and fertilizer producer, closed at $54.38. AGU over all option implied volatility of 39 is near its 26-week average of 38 according to Track Data, suggesting nondirectional risk.

Terra Industries (NYSE: TRA) volatility is flat; TRA is near record on demand for nitrogen. TRA, an international producer of nitrogen products for industry and agriculture, closed at $31.26. TRA is expected to report EPS on 10/25. TRA over all option implied volatility of 52 is near its 26-week average of 50 according to Track Data, suggesting nondirectional risk.

Option update provided by Stock Specialist Paul Foster of theflyonthewall.com.

In response to yesterday's threat from the Chicago Board of Trade (NYSE: BOT)'s largest shareholder, Caledonia Investments managing director Will Vicars, the Chicago Mercantile Exchange (NYSE: CME) announced today that it has revised the terms of its definitive merger agreement with CBOT for the third time.

The Chicago Mercantile Exchange will now offer CBOT shareholders 0.375 shares of CME Holdings for each share of CBOT Holdings, compared to the previous offer of 0.350 shares. The newly valued $9.21 billion offer has been approved by the boards of both companies.

With the revised terms from CME, Caledonia Investments, which has a 7% stake in CBOT Holdings, agreed to support the deal.

The offer, however, is still lower than the $10.12 billion bid from Atlanta-based rival Intercontinental Exchange (NYSE: ICE). Intercontinental said it is willing to enter talks regarding potential increases to its proposal, including a higher value for exercise rights and an alternative integration plan.

Looks like third time may be the charm for the CME. The two Chicago exchanges expect to close the deal, pending a shareholder vote on Monday and regulatory approval, sometime this summer.

Chicago Mercantile Exchange Holdings Inc. (NYSE: CME) opened at $533.30. So far today the stock has hit a low of $533.30 and a high of $539.45. As of 10:55, CME is trading at $535.87, up $2.47 (0.5%).

After hitting a one year high of $596.30 in January, the stock has trended slightly downward over the past six months, bouncing off support at $500 in May. Chicago Board of Trade (NYSE: BOT) management is urging shareholders to vote for a merger with CME rather than the competing offer from Intercontinental Exchange (NYSE: ICE). A vote will be held on July 9. Recent technical indicators for CME have been bullish but deteriorating, while S&P gives the stock a very positive 5 STARS (out of 5) strong buy rating.

For a bullish hedged play on this stock, I would consider a July bull-put credit spread below the $500 range.CME hasn't been below $500 for more than a day since November and has shown support around $508 recently. This trade could be risky if broader markets take a tumble, but CME is not scheduled to report earnings until the week after July expiration.

Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in CME, BOT, or ICE.

MOST NOTEWORTHY: Airtran Holdings Inc (NYSE: AAI), UAL Corporation (NASDAQ: UAUA) and the REIT sector were today's noteworthy downgrades:

• Calyon downgraded shares of Airtran Holdings to Neutral from Add, citing concerns with AAI's yield trends.
• The firm also downgraded shares of UAL Corp to Add from Buy based on higher fuel prices and slightly weaker-than-expected RASM increases.
• Stifel downgraded the REIT Sector citing rising interest rates and mutual fund outflows, among other reasons. Companies that include Cedar Shopping Centers Inc (NYSE: CDR), Kimco Realty Corporation (NYSE: KIM), Kite Realty Group Trust (NYSE: KRG), Ramco-Gershenson Properties Trust (NYSE: RPT), Simon Property Group Inc (NYSE: SPG) and Tanger Factory Outlet Centers Inc (NYSE: SKT) were downgraded to Hold from Buy.

OTHER DOWNGRADES:

• Morgan Joseph downgraded shares of Penn National Gaming Inc (NASDAQ: PENN) to Hold from Buy on valuation.
• CBOT Holdings Inc (NYSE: BOT) was downgraded to Neutral from Outperform at Credit Suisse.
• JP Morgan downgraded shares of Netflix Inc (NASDAQ: NFLX) to Underweight from Neutral, as the firm believes the company's growth will be impacted by Blockbuster Inc's (NYSE: BBI) Total Access offer.

What do Whole Foods Market Inc. (NASDAQ: WFMI) and Sirius Satellite Radio Inc. (NASDAQ: SIRI) have in common? What do Wild Oats Markets Inc. (NASDAQ: OATS), Borders Group Inc. (NYSE: BGP) and Google Inc. (NASDAQ: GOOG) have in common? I'll give you a hint -- they all want to merge with some other company in their field. But the mergers are all very different.

Give me a break, one cannot compare the proposed merger between Whole Foods and Wild Oats to that of Sirius and XM Satellite Holdings Inc. (NASDAQ: XMSR). I know many Sirius and XM investors will lash out at me for this, but come on people! Sarah Gilbert made a very good case yesterday why the merger of the trendy food stores doesn't have antitrust issues: "There is a plentiful supply of organic and natural produce and other products available at both small local cooperatives and farmer's markets and large supermarket chains," least of all Wal-Mart Stores Inc. (NYSE: WMT).

Sirius and XM? Now that's a different story altogether. They are the only two satellite radio companies. There are no smaller competitors, or large competitors with a small market share. That's all there is -- Sirius and XM. Sure, the argument that the market includes iPods, internet and HD radios is very creative and may even work, but let's call it what it is -- a desperate attempt by the two companies to get their merger approved. They've even hired a lobbying firm.

MAJOR PAPERS:

• The Wall Street Journal reported that President Bush picked former advisor Robert Zoellick to take over the World Bank from Paul Wolfowitz; Mr. Zoellick, now a vice chairman at Goldman Sachs Group Inc (NYSE: GS), was a trade representative and deputy secretary of state.
• The Institutional Shareholder Service has advised shareholders of medical device maker Biomet Inc (NASDAQ: BMET) to turn down a $10.9B private equity deal for the company, according to the Wall Street Journal.
• The Financial Times reported that the IntercontinentalExchange Inc (NYSE: ICE) has signed an exclusive deal with the CBOT Holdings Inc (NYSE: BOT), a move that could advance ICE's unsolicited bid for the Chicago Board of Trade.
• Rather than focus on potential take-out targets, Barron's Online's "Weekday Trader" said that the smart bet for investors is to focus on companies with rising profits, cash flows and dividends, such as Loews Corp-Carolina Group (NYSE: CG) and Imperial Tobacco Group plc (NYSE: ITY), which boast free cash and dividends.

OTHER PAPERS:

• Best Buy Co Inc (NYSE: BBY) is in talks with Vivek for a "foray" into India, the Economic Times reported.
  
• The Washington Post reported that Nigeria filed criminal charges against Pfizer Inc (NYSE: PFE) over child deaths.

Over the past few years, a variety of securities and commodities exchanges have gone public. For the most part, it has been lucrative for shareholders.

Now, with the high valuations, these exchanges are engaging in M&A.

And why not? Exchanges benefit from scale – in terms of consolidating trading systems, as well as offering products for investors. It's kind of like the value proposition of eBay. The bigger the network, the more valuable it generally becomes.

Well, the latest deal in the exchange business is the Chicago Mercantile Exchange's (CME) $8 billion purchase of the Chicago Board of Trade (CBOT).

The deal is vitally important for the CBOT.

This morning we had another monumental merger among financial exchanges. The Chicago Mercantile Exchange (CME) is acquiring the Chicago Board of Trade (BOT) in an $8 billion transaction. That translates to a roughly 15% premium from the close for BOT shares, and if the deal closes in all stock, the CBOT will own 31% of the combined entity.

CME would issue approximately 15.9 million shares if the all stock route is taken. Based on the closing stock prices of CME and CBOT on October 16, 2006, the last trading day prior to the announcement of the merger, the combined company is valued at $25 billion (CME equity $18 billion; CBOT equity $7 billion). The merger will not impact core trading rights or membership or clearing privileges at either exchange.

"We are very pleased to announce this strategic merger today," said CME Chairman Terry Duffy, who will be the chairman of the combined organization. "We now will be able to combine the capabilities and best practices of both organizations -- establishing an even stronger, more competitive position than either could achieve individually."

Duffy may believe this merger benefits consumers and shareholders; however, consolidation in financial exchanges can be horrible for the consumer (exchange clients and traders) because the exchange gets to dictate pricing with essentially no competition and no choices.

Both NASDAQ and NYSE have made changes recently to their level 2 feed and equivalent to third parties that are not good for consumers. Now that they own most of the ECN's they can charge whatever they want to third parties. Calling for a blockage of a merger is never a fun situation to be in, but these mega-exchanges are BAD for (traders/consumers). Mark my words.

Most exchanges stocks are higher on this news today: Intercontinental Exchange (ICE) +5% at $80.90; NASDAQ (NDAQ) +1% at $34.89, and International Securities Exchange (ISE) +3% at $50.23. NYSE (NYX), however, is down .4% at $73.58 as of 12:30 p.m.

Jon Ogg is a partner in 24/7 Wall St.