VIX - Options Volatility And Market Sonar: Thursday Recap

by: Erick McKitterick

VIX - Market Sentiment:

Thursday S&P futures were down for the second day in a row after yesterday's 25 handle sell-off. Trading in a fairly loose pattern compared to the last 7 weeks, SPX futures moved from 1509 to 1501 or a handles top to bottom. This, of course, was before the markets opened and traded down another 6 handles in the first 30 minutes, almost touching 1497. Eurozone flash PMI slipped to 47.8 from 47.9, suggesting more contraction in Europe and adding some fuel to the fire. On the earnings front, Tesla (NASDAQ:TSLA) and Wal-Mart (NYSE:WMT) both reported earnings with greatly different results. TSLA shares sank almost 10% at one point in trading today, as EPS loss widened more than expected. WMT, on the other hand, rose after being slapped down last week after an executive email leaked showed weak February sales. WMT profits did top expectations, but missed on revenues. A check on the NYMO shows underlying weakness as we continue to fall back to the 1500 support level. Currently, the NYMO closed with a reading of -25.27, a 33 point decrease due to the sell-off. Remember, we are not, in my opinion, "Oversold" until we get a reading of -80.

As the market struggles to hold 1,500, the spot CBOE Volatility Index (VIX) and futures continued to charge higher, making those who are short volatility cry. Spot VIX continued to move higher another almost 9%, where futures were up only fractionally in comparison. Volatility ETF (NYSEARCA:VXX), 2x ETF (NASDAQ:TVIX), and alternative 2x ETF (NYSEARCA:UVXY) all saw gains as the market continues to lose ground. Yesterday on the sonar report (here), I mentioned a large block seller of the March 15 strike calls, which were sold collecting .95 some 34.5K times. Today, that trader is not happy, as the ask is now looking for 1.80 for these calls, and would equate to a 2.25M+ loss for this one trade from yesterday. Today, VIX pits did see some call buying, with large blocks of the 20-25 strike March call spread going off 25K times. Other premium buyers were March put buyers, believing the volatility is temporary and is looking to capitalize on the market stabilizing.

Statistics and Screenshot Provided By LiveVol

VIX futures are below.


· March VIX futures 15.13

· April VIX futures 15.75

· May VIX Futures 16.40


· March VIX futures 15.93

· April VIX futures 16.35

· May VIX Futures 16.83

Options Paper:

Option paper remained decent on Thursday, but again was masked by the 400K+ options traded by Johnson & Johnson (NYSE:JNJ) as part of the typical dividend steal. Active names today S&P ETF (NYSEARCA:SPY), S&P Index ^SPX, Russell ETF (NYSEARCA:IWM), and ^IWM were all trading above average volume, with overall paper remaining bearish. Apple (NASDAQ:AAPL) and NASDAQ ETF (NASDAQ:QQQ) were also active but again, saw heavy bearish paper. Two names I flagged on Twitter today really struck me as interesting. Bond ETF (NYSEARCA:TLT) on a day where bonds were rallying saw heavy buying of the April 114 strike puts more than 20K times. This, of course, would imply bonds will continue to fall prior to April expiration, which is typical with a bull market. The other trade I flagged today was a large 1:2 ratio spread in the High Yield Bond ETF (NYSEARCA:HYG). HYG saw one trader today buy 30K of the April 92 strike puts and at the same time, sell 60K of the April 89 puts. This trader spent 3.15M buying the 92 strike puts, and collected 2.25M on the sale of the 89 strike puts. Net net this cost, the trader nets 900K in premium and locks up an incredible 267M in buying power to be short the extra short strike of the 89 puts. This trade makes a ton of profit if HYG trades below 91.10 on April expiration but above 89.00, making up to 2.1M in total profit. HYG typically only trades 14K contracts total a day, and today, was more than 6x average daily volume, with puts outnumbering calls 140 to 1.

Statistics and Screenshot Provided By LiveVol

I have many earnings trades in play today. Aruba Networks (NASDAQ:ARUN) and Hewlett Packard (NYSE:HPQ) both report after the bell today. ARUN has been under some heavy put action of late, and the stock has been punished despite all the analyst upgrades. HPQ has been on a tear of late, and large weekly 17.5 strike call buyers came out in full force, even as HPQ has outperformed the broader index by almost 10%. I'm not inclined to believe either of these stocks go higher after earnings, and thus did creative calendar/diagonal trades on both. Again, the consistent bear in me even went as far as to short Abercrombie & Fitch (NYSE:ANF) after price action and put activity had me putting on shorts in this name as well. ANF, of course, reports before the bell tomorrow morning, and weekly IV is sky high, so diagonal and calendar trades make a ton of sense right here. Options activity in all these names was very heavy, with ARUN seeing bullish, HPQ seeing neutral, and ANF seeing bearish paper.

Statistics and Screenshot Provided By LiveVol

Popular ETFs and equity names with bullish/bearish paper:

Bullish Option Flows - ISE & % OTM calls bought on offer

W.R. Grace (NYSE:GRA) 77% - 2.5K OTM calls bought

Cemex (NYSE:CX) 70% - 25K OTM calls bought over last 2 days

Kinross Gold Corp (NYSE:KGC) 66% - Gold miners looking for a bounce

Radian Group (NYSE:RDN) 62% - 2.6K OTM calls bought

Gerdau (NYSE:GGB) 10K ISE calls in 9-10 call spread bought

Bearish Option Flows - ISE & % OTM puts bought on offer

Genworth (NYSE:GNW) 85% - 11.3K OTM puts bought

Tiffany (NYSE:TIF) 80% - 2.5K OTM puts bought

SUPERVALU (NYSE:SVU) 70% - 2.3K OTM puts bought

Weatherford (NYSE:WFT) 4.5K ISE 14-16 bear call spread sold.

Teradyne (NYSE:TER) 1K ISE puts bought

Disclosure: I am long AGNC, BA, CBB, CONE, MOS, MTGE, NRG, PCLN (straddle), TUMI, VHC, VOD, and I am short ARUN, DDD, EDU, HPQ, LULU, PCLN (Strangle), SPY

Trades Today: Closed EOG long (crying), short ANF, short HPQ, sold more of SPY hedge.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment professional as to the suitability of such investments for his or her specific situation.