Merrill Lynch (MER, $36.46, down $1.23) is under heavy selling pressure amid rumors of an impending profit-warning and further write-downs. The company has gone on record and is not preparing to issue a profit warning today it said in a statement. The stock hit a low of $35.38, just 22 cents away from its 52-week low, thirty minutes into the trading session.

Water cooler rumors spread after wire services quoted traders who said there was talk that Merrill would announce a write-down tied to mortgage loan losses. Merrill is the world’s largest brokerage and is due to announce 2Q results next month.

Given the poor quarterly results posted by Lehman Brothers (LEH, $23.88, down $0.58) and Morgan Stanley (MS, $39.01, down $1.18) this week, the bears have now focused their attention towards Merrill Lynch’s earnings. Analysts have been reducing their estimates for Merrill Lynch and short-sellers are trying to throw more gas on the fire.

I’ve been mentioning Lehman more often than Merrill but all of the brokerage firms are in the same boat. The story is the same with all three companies, meaning the market just doesn’t know what the fair value for these stocks are. They are down anywhere from 50%-75% from their highs and although they may seem “cheap”, investors are worried there may be more skeletons in the closet that we don’t know about.

It the past two weeks, Lehman has traded from $34 to $21 back to $28 and is now back below $24. Yeah, that’s volatility and it’s offering the chance to make a lot of money and lose a lot of money at the same time. Merrill hasn’t traded in as wild of a range, instead it has gone straight down for a month. The stock was at $50 on 5/19.

Merrill could continue lower as traders load up on the July 35 puts (MERSG, $2.50, up $0.65) and the July 32.50 puts (MERSA, $1.72, up $0.60).

Rick Rouse