VIX - Options Volatility And Market Sonar: Wednesday Recap

by: Erick McKitterick

VIX - Market Sentiment:

Wednesday S&P futures were mostly flat at the open as investors continue to digest the recent volatility. Futures remained in this fairly tight range until the opening bell and just took off to the upside. The S&P moved up more than 19 handles in a very strong although somewhat lightly traded tape. This big move somewhat was interesting as Bernanke's own forecast showed an unemployment of 6% is still 3 years away. Other news moving the markets and stocks was retailer Coach (COH) which saw unconfirmed reports the company may be exploring a sale. Earnings of course continued and as shown in the sonar report yesterday (here) First Solar (NASDAQ:FSLR) was just smashed down more than 14% on the day. The 600K worth of put premium bought yesterday exploded to the upside which was very bad considering the rest of the market saw green arrows all over the place. For those who follow me and my trades on Twitter I did exit a couple of good earnings plays today, but am still holding some through earnings. J.C. Penny (NYSE:JCP) and Interoil (NYSE:IOC) has some crazy high volatility skew. The best way to capitalize off of this is to play diagonals or calendar spreads depending on your thesis.

The spot CBOE Volatility Index (VIX) and futures continued to fall today after going above 19 on just Monday. Apparently the market completely forgot about Europe and any US Sequester issues as it climbed higher throughout the day. Volatility ETF (NYSEARCA:VXX), 2x ETF (TVIX), and alternative 2x ETF (NYSEARCA:UVXY) were crushed along with futures as volatility sellers came back into the market as we moved back to towards the 1520 resistance level. Today VIX options were clearly bearish with 2.3M in net calls sold against 1.6M in net puts bought on 670K+ contracts trading on the day. This is above the average of 574K contracts in a given day with calls outpacing puts 1.4 to 1. VXX was a little different as calls were actually net bought with 1.7M in premium as it appears those who are short VXX calls may have covered some as volatility comes back down.

Statistics and Screenshot Provided By LiveVol

Just for reference I'm including 3 days of VIX futures which are listed below.


· March VIX futures 17.65

· April VIX futures 17.47

· May VIX Futures 17.52


· March VIX futures 17.00

· April VIX futures 17.35

· May VIX Futures 17.55


· March VIX futures 15.25

· April VIX futures 15.95

· May VIX Futures 16.56

Options Paper:

Option paper returned again to being somewhat slow concerning me regarding this "Rally." Option contracts only traded 14.47M contracts which is far from heavy paper. Calls did outnumber puts which is overall bullish but this number is far from the put buyers we saw on Monday's selloff. As usual S&P ETF (NYSEARCA:SPY), S&P Index ^SPX, ^VIX, Apple (NASDAQ:AAPL), and Russell (NYSEARCA:IWM) lead in terms of option volume. Today these 5 names accounted for more than 5.3M contracts or 33% off all options traded. If you look at other names including VXX, NASDAQ ETF (NASDAQ:QQQ), and Bank of America to the top 5 you exceed 6.5M of the 14.47M contracts trading today. As mentioned earlier my radar shifted some funds from some of my winners such as VirnetX (NYSEMKT:VHC) to some earnings plays in JCP, IOC, and (NYSE:CRM). IOC was one of the most intriguing ones for me as the weekly volatility was as high as 189% in a stock where the straddle is expecting a 6.30 move or ~8%. The call and put bids were amazing to me as the 90 strike calls almost 17.00 out of the money saw bids of .20 for options expiring in 2 days on Friday. I used this opportunity to buy further out strike calls and sell the weekly higher priced calls 2x to reduce cost. This is a risky play as I typically don't like being short naked calls but if IOC explodes to the upside I will just buy common in the afterhours to cover the calls. Options activity in this name today was mostly neutral but over the last 2 weeks large 2M inflows have come into this name so I decided to play it from the long side. This is in contrast to the 2.8K OTM puts bought just today or 43% of the put activity. Options activity today was 2x average daily volume with calls outnumber puts 1.7 to 1.

Statistics and Screenshot Provided By LiveVol

The other play for today was my long calendar on JCP. JCP stock has been a train wreck and I expect this quarter to be a disaster, but with a 37% short ratio any sign of recovery could have shorts running in this name. Paper has been mostly split of late with bulls slightly edging out the bears and was the case yet again today. Calls today on JCP were almost dead split on both calls and puts in terms of sold on bid and bought on the ask. This leads to a very interesting net premium showing calls were overall just barely bought and puts were overall sold to the tune of 125K. Options activity was heavy as one would typically expect with today hitting almost 3x average daily volume. The biggest trades today were sellers of the May 20 strike puts 2.3K times and sellers of the April 15 strike puts 1K times. On the call side the largest trades were again sold with the March 12 calls and the July 32 strike calls both sold more than 1K times each. The volatility on this name is crazy high right now with the weekly options pricing in 200% implied volatility showing the price of weekly and front month options is crazy expensive. I used this opportunity to buy the May calls and sold the weekly calls against it to reduce cost by 25% on my long position in this name.

Statistics and Screenshot Provided By LiveVol

Popular ETFs and equity names with bullish / bearish paper:

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

Canadian Natural (NYSE:CNQ) 83% - 4.8K OTM calls bought all on ISE

RF Micro (RFMD) 82% - Cheap shot buyers looking for a possible takeover?

SandRidge (NYSE:SD) 68% - This name keeps seeing heavy call buying I am adding to my radar

Amarin (NASDAQ:AMRN) 4K ISE calls

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

Industrial ETF (NYSEARCA:XLI) 69% - 5K OTM puts bought on offer

SD 52% - Just as calls hit puts were also bought

Chico's (NYSE:CHS) 40% - 3.1K OTM puts bought

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it!

Disclosure: I am long AGNC, BA, CBB, CONE, ENDP, IOC, JCP, MTGE, NRG, TLM, TUMI, and I am short ARUN, DDD, EDU, LULU, SPY

Trades Today: Closed VHC long, Closed VOD long, Closed CRM long, Bought ENDP calendar, Bought JCP calendar, Bought TLM calls.

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.