VIX - Options Volatility Sonar: Friday Recap

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 |  Includes: CHS, CROX, CSCO, DAL, LUV, MOS, SDS, SFLY, SPY, UAL, VXX
by: Erick McKitterick

VIX - Market Sentiment:

Happy holidays! The market today as expected was so light I think I saw tumbleweeds move across my screen. The pre-market was almost non-existent as futures moved less than 10 points. The SPY initially traded up to the 126 ceiling in pre-market but then slowly faded into the open. The U.S. equity market has not had this tight of a pre-market trading range since June 2011.

So the real question is what does this recent rally all mean? The CBOE Volatility Index (VIX) continued to remain above 21 which is interesting as the VIX should be seeing weakness on an upcoming three-day weekend. However, it appears this pricing has been ground into the VIX in days past but continues to hold the 21 level. Some people continue to hold the S&P puts as they are not willing to give up all put protection going into the Christmas weekend.

The collar hedge mentioned from yesterday even in this up tape actually continues to hold full value. I will continue to keep this hedge on as I do believe we are at the top end of the wedge and next week if we get follow through to the upside I will adjust then. As for now I still believe next week’s action could be flat to down.

Options Paper:

Cisco Systems (NASDAQ:CSCO) saw a flurry of weekly 19 call lottery tickets purchased early today. More than 5K of the CSCO calls traded as cheap shots to the upside as CSCO consolidates around support. This is nothing more than a pure play for a pop in CSCO next week. A very short term bet and traders could use common as a proxy or even the 18/19 call spread for .35.

The S&P cash Thursday saw a very large trade on the 1240 puts to the tune of over 52 million in a single trade. Around 11:42 this trade hit the wire when 25K S&P cash January 1240 puts appear to have been purchased. This trade is already down greatly, almost 5 million overnight, but it will be interesting to see what next week and the next 29 days bring us in the market. This also is interesting as the 21 SDS weekly calls were purchased yesterday 15K times and are also down 50% as we melt north of the 1260 mark.

Volatility Explosion:

United Continental (NYSE:UAL) today saw the implied volatility move more than 10%. Today UAL sold off more than 5% in early trading with options pricing moving up dramatically. Although option volume as expected was light the spreads continued to stay tight. UAL and airlines such as Delta (NYSE:DAL) and Southwest (NYSE:LUV) have been under pressure as oil prices continue to rise.

Volatility Implosion:

Crocs (NASDAQ:CROX) saw a drop in IV today even in a very tight trading range. This small-cap stock was slapped back down to earth back in October and has not recovered. Today the bulls were buying some calls across the space possibly on Chicos (NYSE:CHS) takeover speculation thinking it could leak over to CROX.

Other Options Action:

Mosaic (NYSE:MOS) saw some weird action in the options world buying the 52.50 calls which expired today. More than 3K of these calls crossed the wire expecting a pop just after the open today. With the call buying in this name a good play could be selling a put spread. You could sell next week’s 50/47.5 put spread and collect .20 between now and next Friday with only four trading days. This would be a 5% decline in MOS stock price before you would take any losses. 230.00 buying power must be surrendered for this but collecting 20.00 per contract is not a bad return in just four days of trading.

Speculative Play Friday:

Last week's speculative play Shutterfly (NASDAQ:SFLY) was a good play for anyone who sold it prior to the Friday cut in forward guidance. With this news I am changing my thesis to a hold and possible short moving forward as this stock will get crushed if the books and fundamentals get better. A takeover bid could always be in the works but my opinion is now negative on this stock even though a possible pop could be in the future.

This week’s speculative play is Chicos (CHS). As mentioned earlier in this article there has been some recent takeover talk on this women’s apparel name. Thursday, Forbes reported call buyers in the May option’s in combination with Citigroup raising their price target helped lift the stock almost 2%. Today the calls continue to roll off the line this time on the Jan 11 and Feb 12 calls. Watch Chicos moving forward to see if an analyst upgrade or possible bid offer continues to drive the price higher.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.

Disclosure: I am long SDS, AGNC, NLY.

Additional disclosure: I am short: INTC, DHI, LNKD, FINL, EWG, VXX, AMZN. 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.