VIX / Volatility Options Sonar: Thursday Recap

by: Erick McKitterick

VIX - Market Sentiment:

Today was a very interesting day of trading. Early on the VIX held a fairly tight range as people awaited the all important Philly Fed number. Estimates were for the Philly Fed reading to come in at 5.1 and these numbers were blown away with the initial reading of 10.3. This number initially allowed the market to extend its gains as underinvested funds ran to chase performance. This appeared to immediately be met with a wave of sellers at the 1226 level in the S&P dropping it back down below the 1220 level. This type of “sell the news” has become all too familiar in recent months, but one key point is the VIX appears to have had a muted response prior to the European close.

Finally after the last three days of next to no option paper some traders are finally starting to put on some trades. Most are very low probability trades but regardless some paper is beginning to flow.

Options Paper:

Credit Suisse (NYSE:CS) today saw a large buyer of the January 25 calls to the tune of 11K. Open interest in this strike is less than 100 so this is a new bullish bet CS could be due for a run in the next month. Keep your eye on this as this one could be priced to move. Looks like at least one trader is looking for CS to run back to the 50 dma currently sits around the 25.34 level. Call volume was more than 10x normal in CS with calls outnumbering puts almost 190:1.

CBRE Group (NYSE:CBG) saw a very large put roll in the January 15 strike. Just after 10:00 a large what appears to be buyer came in buying 11,000 puts in a single transaction. The trader appeared to have sold the December 17 strike put and used part of the proceeds to buy the January 15 strike put. This trade of 9,000 puts was bought on November 2nd for 1.25 million and just sold the position for 1.85 million in just under 2 months. This position is known as a roll out and down as the part of the sale was then reinvested as bet stating CBG will retrace even lower in the upcoming month. CBG put volume was more than 12x normal.

Volatility Explosion:

Zoll Medical (NASDAQ:ZOLL) saw an explosion in its 30 day implied volatility as the medical device and software solution provider shot up more than 11%. No major option paper appears to have been tied to this but the more than 50% rise in IV suggest option traders are pricing in heavy premium as the January options are implying more than a 13% move prior to January expiration. Please note this is an extremely thinly traded stock and the options aren’t very liquid players should be very careful in this one.

Volatility Implosion:

Fedex (NYSE:FDX) saw options volatility plummet more than 25% after the transport carrier reported better than expected results. FDX traded up more than 5% at the open and as expected the IV was sucked right out of the options as puts were sold for whatever they could get out of the remaining December premium. Remember these options are set to expire tomorrow combine this with the earnings release and this really breaking news but instead a FYI to traders. Anyone who has diagonals or calendars could now roll to a January spread at this point and capture the options premiums if they wanted to bet either up or down.

The iPath S&P VIX ETF (NYSEARCA:VXX) also saw a large shot to IV as volatility came out of the options premium as traders adjust for the upcoming year. The majority of this was call sellers unloading short term volatility hedges as traders begin to let go of volatility protection. Because the VXX is a flawed instrument as I pointed out in a previous article here. I believe the best way for anyone seeking hedges at this point is through SPY puts directly. The current structure would take a very big selloff to get the VIX to go back into "backwardation" and thus SPY puts or SDS calls would respond better in the short term.

Other Options Action:

Targacept (TRGT), a very familiar name to my articles, once again saw another bullish calls spread purchased. This time the January 10-15 call spread appears to have been bought more than 9,000 times. This stock has been pounded of late and another trader is positioning for a possible reversal. The trade cost only .45 and has a potential profit of 5.00 if TRGT is above 15 at January expiration.

Nokia (NYSE:NOK) saw a large purchase of the July 8 calls around 25,000 times. This appears to be an outright bullish bet NOK has seen a bottom and is ready to rebound. Options volume is almost 4 times more than average with calls trading more than 7x to puts

The financial ETF (NYSEARCA:XLF) also saw some large bullish paper showing people have some hope the financial stocks will recover. I still personally believe the financial sector as a whole are toxic and would stay away. Sector specific stocks may work here but the ETF as a whole I believe is nothing more than a short term trading instrument.

Research in Motion (RIMM) has seen a massive decline over the last 6 months and it looks as some traders are looking for more after earnings tonight. Call selling and put buying across the board appears to be crossing the options market. Watch for RIMM share prices to move big post earings.

Disclosure: I am short RIMM, INTC, VXX, DHI, AMZN.

Additional disclosure: I am Long: NLY, AGNC, PAAS, TGRT, FNSR, IR I shorted the RIMM 14/16 call spread to buy the RIMM 14/13 1:2 put spread.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.