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VIX - Market Sentiment:

Happy holidays! The pre-market today saw yet again almost no movement in the S&P futures with only a 4 handle move. This is interesting as Friday’s market close saw the spot CBOE Volatility Index (VIX) sell off hard but the futures actually rose. The interesting part about this movement is traders and institutions are actually continuing to pay up for VIX futures but appear to be selling options across the board. This condition has some traders confused as to why the popular Barclays iPath VIX ETF (NYSEARCA:VXX) traded higher all day on Friday.

This is shown perfectly as the spot VIX today rose more than 9% and the VIX calls in January actually lost value in early trading. In my previous article I pointed out although the spot VIX closed on the low the VIX futures closed at the high of the day on Friday. Because the VIX futures were flat the adjustment for theta caused VIX calls to lose some value initially as trading began.

The market continued to meander higher throughout the day and into the close. Interesting as SPY volume just cleared 1M contracts shortly after 3:00 pm but Apple (NASDAQ:AAPL) option volume was almost 2x normal on the weeklies which expire on Friday. Very odd difference in as the rest of the option volume was anemic at best. The real market mover in the future will be to see how the Italian bond action goes tomorrow when today interest rates on the 10yr bond went above 7%. Stay tuned as this low volume market could be in for a rough week if the bids come out of the market.

Options Paper:

PowerShares DB ETF (NYSEARCA:UUP) saw a shutdown of a large 23/24 March call spread to the tune of 68K. An interesting note is the majority of this trade appears to have been put on back on December 13th 50K times and the trader sold the spread at a significant loss. With recent weakness in the euro it will be interesting to see if the player moves the trade to another strike. This could be bullish for the euro short term but I am not convinced and will stay on the sidelines.

Some popular ETF’s and equity names today saw some bearish paper in the terms of put call ratios.

  • S&P Metals (NYSEARCA:XME) 10:1
  • Euro Trust (NYSEARCA:FXE) 6:1
  • Materials (NYSEARCA:XLB) 6:1
  • Deutsche Bank (NYSE:DB) 8.5:1
  • Kroger (NYSE:KR) 16:1
  • eBay (NASDAQ:EBAY) 5:1
  • DR Horton (NYSE:DHI) 2.5:1

Volatility Explosion:

Sears Holdings (NASDAQ:SHLD) saw a more than 33% increase in implied volatility after the retailer today announced closing more than 100 stores. Put buying and call selling was rampant across the board in many strikes and expirations. The 30 January puts were active early as the stock sold off by more than 19%. Puts outnumbered calls more than 2:1 on the trading day.

JA Solar (NASDAQ:JASO) saw IV absolutely explode when a large number of June 1 puts were bought. There is 0 current open interest in this name so someone is betting this stock is basically going to take a large leg down in the next 6 months. A similar trade happened on American Airlines (AMR) just a few weeks before they declared bankruptcy. JASO put volume was more than 10x average daily volume.

Volatility Implosion:

Mead Johnson (NYSE:MJN) saw a huge drop of almost 10% in IV today after tests showed their flagship product showed no signs of the bacteria which killed an infant in Missouri last week. The options as expected followed the price action and puts lost incredible amounts of value. Although the final decision will come from the FDA the initial tests were positive for MJN stock price. MJN traded up more than 5.5% in early trading.

Other Options Action:

Best Buy (NYSE:BBY) after what has been an atrocious December once again saw some bearish option flow. Today the June 19 strike puts were purchased more than 2,000 times. It appears as if one trader is yet again betting the retailer will continue its slow march into a downward spiral. This follows some heavy put buying again last week even in an up tape. Puts outnumber calls more than 6:1 on this consumer play.

Rackspace (NYSE:RAX) saw a large put spread in the 42 – 36 February expiration. The 42’s were bought 5K times and the 36’s were sold 6K times. The total net of the trade was a debit of 795K betting RAX will trade below 40.65 prior to February expiration. This would capture the RAX earnings expected on February 9th and would profit more than 2.2M if the trade works. I followed this trade and will look to fly it out in the future or to a possible 1:2 depending on price action. I paid 1.55 for the 6.00 spread and contributed to the dominance of puts as they outnumbered calls more than 45:1.

Disclosure: I am long AGNC, NLY, SDS. I am short: VXX, SIAL, RAX, LNKD, FINL, EWG, DHI, AMZN

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