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VIX - Market Sentiment:

Tuesday the pre-market was very strong heading into the opening of the US markets. This appears to be very similar to Tuesday’s pre-market as Europe slowly melted up, leading our futures higher. As expected, with many professionals home for the year-end holidays, we saw a less volatile pre-market than weeks past, only moving 21 handles. Remember just 2 weeks ago we were seeing a 40 handle move in the pre-market.

Monday, the CBOE Volatility Index (VIX) signaled nervousness in the market, and the end of the day saw a rather sharp selloff. In comparison, Tuesday the VIX showed complacency as the market rallied right back to resistance of 1225 in early trading, and went right through this mark up to 1240, then settled back to 1235 by mid-day and is trending higher into the close.

A very interesting point to make is although midday the VIX traded around 23.25, but the VIX futures implied a settlement tomorrow morning around 24.10. This implies futures still expect a potential large spike of VIX into December settlement, which opens tomorrow. The VIX futures typically move almost in lock step with the current VIX price the day before settlement.

This could possibly be from the economic news such as Italian GDP and US Existing Home Sales, which is set to come out tomorrow morning. The other thing is this is also the first expiration where the VIX futures are traded in pre-market prior to December settlement. In comparison, January and February futures are pointing to 27 and 28, respectively, still showing some caution as big players continue to hold some protection.

Options Paper:

NiSource (NYSE:NI) saw a call roll out to April expiration. Today one trader sold his position in the Jan 22.5 calls and rolled the position to the Apr 25 strike. This appears as a bullish trade looking for NI to trade up to or above 25 prior to April expiration. There is around another 6K of the 22.5 calls which would remain in open interest if this is correct so it will be interesting to see if anyone else adjusts positions moving forward. Option paper was more than 10x normal with calls outnumbering puts 133:1.

US Bancorp (NYSE:USB) today saw a 10,000 call purchase in the March 28 calls. This appears to be a bullish bet the regional bank will continue to outperform the rest of the financial sector. Many commentators continue to be bearish on financials in general but USB has a solid bank business and great balance sheet with little to no exposure to Europe. Even big time financial bear Jim Cramer’s only bank pick USB. USB was up 2.75% on the day trading north of 26.00. Call activity was active across the board in financial names such as UBS Financial (UBS), Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), and Morgan Stanley (NYSE:MS).

KB Home (NYSE:KBH) saw some very high put volume today with more than 24,000 trading on the put side. Almost all this volume was in a single trade just after 11:00, when more than 21,000 of the January 7.5 strikes puts went off. These puts appear to have been sold showing conviction KBH will stay above 7.02 prior to Jan expiration. I personally have a contrarian view to this, as I am short DHI. I believe although the numbers today were good, I do believe the housing market still has a long way to go in the future. Puts outnumbered calls 6:1 on the trading session.

Volatility Explosion:

Sprint Nextel (NYSE:S) saw an initial pop in implied volatility as the stock traded up over 4.5%. S reacted very positive to the AT&T (NYSE:T) announcement yesterday they were dropping the takeover bid for T-Mobile. Both S and T weekly calls had a somewhat muted response to the news, but S appeared to run as puts continued to hold value even trading up on the day. Options volume was low in this name into midday trading.

Volatility Implosion:

Targacept (NASDAQ:TRGT) has been a common name on these daily reports, and today is no different. TRGT saw a 40% drop in implied volatility today when the stock traded down more than 25%. The call options have been very heavy in this name in recent weeks, showing a more bullish stance. It convinced me to put on a risk reversal on this stock to try to capture this potential move up. It turns out following this trade was wrong, as this trade has now been stopped out of my portfolio. There appears to not be any major option activity tied to this large move, which is unusual. Regardless, it turns out the nearly 15,000 January 10 call options will expire worthless, and my position is closed at this time.

Jefferies (JEF) today reported better than expected results and as expected the options volatility imploded. The Jan 14 puts were initially active with a 3,000 block trading just after 9:40. The IV30 reading dropped from 73% to 59% in the blink of an eye. The options paper appeared to be people selling put protection now believing JEF will not crater the way MF Global did in October.

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

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.

Source: VIX - Options Volatility Sonar: Tuesday Recap