The initial burst of enthusiasm has evaporated regarding yesterday's news that Merrill Lynch (MER: sentiment, chart, options) has agreed to sell $30.6 billion in collateral debt obligations (CDOs). As Bank of America analyst Jeffrey Rosenberg said today, "Merrill now finds itself effectively in the position of having sold off its upside but retaining its downside." In a report, Rosenberg said that Merrill Lynch has financed 75% of the sale, leaving it vulnerable to further losses if the assets decline in value by more than 5 cents on the dollar.

The analyst's cautious tone stands in sharp contrast to that of Fox-Pitt Kelton's David Trone. This morning, Trone raised his opinion on MER from "underperform" to "in line." In a note to clients, he said, "Management capitulated and accepted huge shareholder dilution... in exchange for the dumping of its most toxic problem assets... With this move behind them, we now believe Merrill Lynch shareholders have much lower risk on a going-forward basis." However, he tempered his apparent optimism by slashing MER's price target from $36 to $29, and widening his third-quarter loss estimate from $1.29 per share to $2.86 per share.

After an upbeat start to the session, MER is now struggling to stay in positive territory. The shares are down 51% year-to-date, and are now trading on the south side of last-ditch support from their 160-month moving average.

Like Rosenberg, option traders weren't completely won over by Merrill's CDO sale. The International Securities Exchange (ISE) reports that traders on Tuesday purchased 24,221 puts to open, compared to 21,579 calls. The stock's current Schaeffer's put/call open interest ratio of 2.05 reveals that puts double calls among near-term options, and it's also hovering just 1 percentage point away from an annual peak of pessimism.