VIX/Volatility Options Sonar: Wednesday Recap

by: Erick McKitterick

VIX - Market Sentiment:

What a wild day in the markets and according to the CBOE Volatility Index (.VIX) you should get ready for even more volatility. The fear indicator spiked at the open after the futures prior to the start of trading went all over the board. S&P futures opened at 1255.40 and shot up 13 handles to a high of 1268 but then faded into the open back down to 1250 range. This 18 handle move in a matter of a few hours seemed to be fueled from some late pre-market selling of the financial stocks in Europe leading into the market open here in the US. Many stocks such as Deutsche Bank (NYSE:DB) traded down more than 3% prior to the market opening. However, after the S&P was pressed at the open it continued to push back higher pairing most of the losses just after lunch. The key to this move is the spot VIX price did not believe the run-up as it continued to hover around the 29 level. Investors should watch the key support and resistance levels here as a big move could be coming.

Options Paper:

On a somewhat slow option day Commercial Metals (NYSE:CMC) saw around 6x normal option paper today with more than 11,000 contracts trading. This is probably in response to the Carl Icahn repeat offer for 15.00 after the board rejected the offer earlier this week. The interesting part of this trade is 5K of the January 14 calls appear to have been bought at the same time as 5K of the January 12 puts. This appears to have been a closing transaction of an options strangle which was put on just yesterday.

Volatility Explosion:

THQ (THQI) saw a large block trade of 1 strike puts cross the wire just after 10:00. Looks as if someone is betting THQ share price could possible collapse prior to the January expiration. Shortly after these puts traded THQ saw its share price plummet as much as 8.5% before stabilizing. The IV30 index shot up to 169.00 gaining more than 77.00 pts on the day.

Volatility Implosion:

Delta Airlines (NYSE:DAL) saw volatility come in today by almost 6% as the airline share price regained some ground lost yesterday. The DAL options volume has been active of late since the American Airlines (AMR) filed for bankruptcy in November. A few notable options trades were some blocks going off in the Dec 9 strike.

Other Options Action:

Shaw Group (NYSE:SHAW) today saw more than 7x normal volume in the options markets. Almost all of this volume was generated when someone closed a 4K block of the Dec 26 strike calls and puts. These options appear to have been sold at the bid and appear to have been a closing transaction. Look in the upcoming days to see if this straddle trade is put back on at a different strike as a possible opportunity.

Bank of America (NYSE:BAC) once again saw some large blocks trade. The Dec 6, Jan 6, Jan 7.5, and Jan 15 call strikes all saw some large blocks of call options trade. These option prices have exploded as BAC moved from 5 to 5.80 in just over 5 trading days. This is probably option players taking some profits after this massive move. Keep an eye on open interest to see if these trades are profit taking or if they are rolling to other strikes and months.

One last point is a large 20K block of puts which traded in the PowerShares QQQ. This large block came pretty much at the highs of the day and was purchased for .33 around 12:30. This is a 6 million dollar bet the QQQ could possibly end the year very badly which would re-test the August and October lows.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in DB, QQQ, BAC over the next 72 hours.

Additional disclosure: 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.

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