VIX - Options Volatility Sonar: Wednesday Recap

by: Erick McKitterick

VIX - Market Sentiment

Wednesday U.S. markets woke up to the least volatile pre-market in almost a month. The S&P futures only had a 10 handle move from top to bottom, which is a far cry from the 40 handle move just last week. This follows worldwide markets which traded down overnight around 1%. The CBOE Volatility Index (VIX) once again had a muted response to the market opening today at 26.16. The VIX however, in the first 30 minutes of trading began to climb and continued into the mid-day as the SPX traded down more than 1%. This action in the VIX is somewhat to be expected as traders are looking to options in order to hedge both long and short positions as we trade into the end of the year.

Thus far this week other than retail sales has been a very slow week both trading and for economic numbers. This, however, will change tomorrow when we wake up to German Retail sales numbers and U.S. PPI and Unemployment claims. Additionally the market will need to digest the all important Philly Fed Manufacturing Index number with estimates currently at 5.1. These numbers have been a very good indicator of future performance. We had a very large miss back in August and big gain in October, which followed the market higher and lower respectively. Refer to the diagram showing the Philly Fed chart below courtesy of

(Click chart to expand)Click to enlarge

Options Paper

The SPDR Gold ETF (NYSEARCA:GLD) once again is seeing some very interesting option paper as it nears the all important 157.15 level. This 200-dma is the primary support for GLD and if it closes below this price a couple days in a row all trend lines for the up move in GLD are broken. Large personal investors have watched the price of gold drop 6% in less than a week and for the “safety” of gold this is just way too much pain. Dennis Gartner announced he has completely liquidated his stake and now technicians who follow gold may appear to try to take this well below support. Short-term retracement levels could easily take GLD to 145 then to 120-125 depending on your starting point or chart. However, the important thing to note here is we are technically at long-term support here so a move up is not out of the quesiton either. GLD puts traded more than 2:1 puts to calls in early trading.

Avon (NYSE:AVP) today saw more than 3.5x normal option paper. This appears to be in response to the recent board action to remove Andrea Jung as CEO. AVP has long been in the sell block of Wall Street commentators such as Jim Cramer. Avon may be ready to possibly take the next leg up with calls outnumbering puts by more than 2:1.

Volatility Explosion

DR Horton (NYSE:DHI) yesterday saw a large put buyer come in and purchase a large amount of the January 11 puts for .22 bringing the OI in this name to more than 14K. This appears to have been an outright bearish bet DHI was going down. After seeing this trade I did buy some of the puts trying to ride the momentum down as the IV of these puts continues to rise. This downward action continued today as analysts came out downgrading DHI and Toll Brothers (NYSE:TOL). Keep an eye on DHI in the upcoming weeks to see if this trade pays off. These puts increased more than 50% yesterday alone so put spreads may help protect in case we have a large IV drop if one wanted to get into this trade.

First Solar Inc (NASDAQ:FSLR) saw a jump in IV when earlier today it announced a cut in forward earnings. The company now sees net sales of 2.8-2.9 billion down from an earlier forecast of 3.0-3.3 billion. Per share earnings were also cut from 6.50-7.50 down to the 5.75 to 6.00 range showing a possible increase in expenses moving forward. FSLR was trading down more than 10% in pre-market trading and was followed through as FSLR after the bell rang trading down to 37.30, immediately traded down to the 35 range. The options activity showed more people running for cover in this name as puts appear to have been purchased across the board. With IV at these elevated levels and wanting to short such a volatile name put spreads or calendars are an absolute must.

Volatility Implosion

Broadcom (BRCM), which is normally a somewhat volatile name, today saw more than 5% come out of its option pricing. This was after a BRCM update that saw Q4 revenue at the “High End” of the forecast. BRCM shares rose almost 7% in early trading and the calls were extremely active in early trading.

Other Options Action

Green Mountain (NASDAQ:GMCR) took an absolute beating today. Option traders appear to be looking for yet even more downside as puts appear to have been bought and calls sold across the board. This was on the news GMCR shipments from China are declining. GMCR traded down more than 12% on the day.

BMC Software (NASDAQ:BMC) software over the last week has seen some higher than normal option volume. This continued today with option volume more than 4x normal in the options market. Almost all of this was done in a single bull closing his January 60 calls. A block of 5K calls traded around showing a liquidation or closing of a bullish position as these calls were not rolled out or down.

Cheniere Energy Partners (NYSEMKT:CQP) had more than 1.7K contracts cross the wire today. The January 16 calls appear to have been bought across the board showing a somewhat bullish sentiment. CQP was up today in a down tape also suggesting a possible trend change.

Once again major ETF players SLV, EEM, SPY, QQQ, GLD, XLF, and IWM lead the total option contract names with the only single name player is Apple (NASDAQ:AAPL). Although once again option paper overall has been weak especially for this time of the year. Keep an eye on the puts and calls in this these names to possibly show tells of market direction in the upcoming weeks.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it!

Disclosure: I am short INTC, VXX, DHI, AMZN. I am Long: NLY, AGNC, PAAS, TGRT, FNSR, IR

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.