VIX - Options Volatility Sonar: Friday Recap

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 |  Includes: BBRY, DAL, DHI, GILD, SFLY, URI
by: Erick McKitterick

VIX - Market Sentiment:

Friday US markets woke up to a much less volatile pre-market. The majority of this move was attributed to the lack of action in Europe. Thursday the IMF president made a statement basically stating we are headed for another depression. The S&P pre-market Friday moved just 12 handles top to bottom. The big number today was US Core CPI which came in at 0.2% with an estimate of 0.1%.

At the open US markets had very modest gains, but once again traded on fairly light volume. Early on the CBOE Volatility Index (.VIX) declined as the less volatile markets appear to have both rallies and selloffs in check. This was shown as the VIX crossed below 24 before creeping up throughout the trading session. The S&P lost 15 handles from the high established around 10:30. This was concerning because the S&P appears to be setting up for an absolutely perfect downward triangle suggesting a possible move down to the 1180 range before we see a significant pop.

Traders who fear this as I do should consider buying protection at these lower volatility levels as if the market does sell off prior to year end puts will be very expensive. I personally believe the SDS 20 / 23 call spread can be bought for ~1.00 and could help protect any long positions you have for a very small premium. If the market cratered the call spread would triple in value in just 36 days.

Options Paper:

D R Horton (NYSE:DHI) is a name which has seen a lot of bearish paper today had one trader rolling a covered call out 2 months. Earlier today a closing transaction numbering 36K of the December 12 calls appear to have been purchased while the February 12 calls appear to have been sold an equal number of times. The calls were sold back in November for an average cost of around .50 and were closed today for .17. This generated effectively a 3% yield on the stock in just over 30 days. The trader appears to be attempting to do the same thing generating this time selling the February calls for .93. Option volume was more than 10x the daily average in DHI.

Delta Airlines (NYSE:DAL) may not be a very sexy name to the options game but today the options sure were active. Today DAL saw the options light up with December and January both very active. It appears some traders were rolling bullish positions out to January at both the 9 and 10 strike price. Although I am not a fan of the airlines they appear to have potential to pop with fuel costs coming down and costs being kept in check. Today DAL calls outnumbered puts more than 5:1. As a side note I am overall bearish on the airlines but this is one I may look at in the future.

Volatility Explosion:

Pharmasset (VRUS) saw an explosion in its 30 day implied volatility which shot up more than 40%. Calls and puts were fairly heavy on both sides of the coin and mostly active in the January expiration. VRUS does not report earnings until February 6th so this activity is odd as it appears some people are hedging some long positions for a drop. A report earlier today stated VRUS halted a Hepatitis C Drug which caused the stock to trade lower by more the 3%. Options activity traded more than 8.5 times normal volume suggesting a possible big move upcoming.

Volatility Implosion:

Research In Motion (RIMM) saw near term options volatility plummet more than 20% after the company reported a terrible quarter on Thursday. If RIMM guiding down wasn’t bad enough they also announced the next launch of Smartphone platform was delayed. This caused the stock to plummet which normally would drive IV up. However, the measure of IV almost always drops after earnings reports and RIMM is no exception. I have been a long time bear on RIMM as I believe the business model of this stock is broken. Regardless the stock traded down today on very heavy volume and because I was in the December options as of market close today I effectively have no position in this stock. I still think long term RIMM is going to 5.00 the same way Palm did just a few short years ago.

Other Options Action:

United Rentals (NYSE:URI) saw more than 10x normal option volume today. The majority of this was January 28 call purchase adding to a 2K position already in the open interest. These calls appear to have been purchased and could be one trader possibly speculating on takeover target. URI has been running hard since the first of October and it looks as if someone believes there is more upside to come. URI traded up more than 3% on the day.

Speculative Play Friday:

So something new I am adding to my daily recap is on Friday I will include a speculative play I am looking at from a personal level.

This week’s speculative play is Shutterfly (NASDAQ:SFLY). SFLY has a very interesting setup as this thing has been absolutely destroyed since October 24th. This has an interesting setup as I’ve personally never seen a stock where every technical indicator not only shows oversold but shows max oversold. Williams, OBV, RSI, and PVI all show massive liquidation in this name. The interesting part is the MACD is about to signal a potential reversal which could catch shorts leaning a little too hard on this name. My specific look is at the March 25 /35 call spread for 2.25. If SFLY does pop on any news or begins to run back to the 50 dma of 37.01 this call spread could quadruple in less than 3 months. It is important to note I currently have no position in this currently but do have a bid in for this trade at the 2.25 level. One more brave could do a risk reversal by selling the 20 put to buy the 25 call and get an even larger gain.

As always happy trading and stay hedged. Remember, equity insurance always looks expensive until you need it!

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

Additional disclosure: I am Long: AGNC, NLY, PAAS, TRGT, FNSR, IR

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.