VIX - Options Volatility Sonar: Wednesday Recap

by: Erick McKitterick

VIX - Market Sentiment:

Wednesday's early trading saw S&P futures fade into the open down 7 handles. This was fueled by fears of Europe and China but appeared to be the market taking a breather. This is somewhat to be expected as the SPX has basically went up 80 straight points. Additional weakening came from euro/USD causing the euro to decline and the U.S. dollar to gain.

At the open the CBOE Volatility Index (VIX) was up but then continued to melt down as the market continued to melt to the upside. If anyone has any amount of fear this market is extended to the upside now is the perfect time to buy those Ultrashort S&P (NYSEARCA:SDS) calls or S&P ETF (NYSEARCA:SPY) puts. These are a better hedge here as the spot VIX continues to trade at a large premium to the markets. On the other side of this trade a buyer of the January 25 VIX puts came in today showing a very bullish tone believing the futures are priced way too high.

I like the 19 SDS calls as a 2x hedge in case of a pullback below the 200 DMA.

Options Paper:

Western Digital (NYSE:WDC) has seen some interesting option paper of late and today was no different. Today a rather large 6K put 15K call risk reversal. 6K of the February 29 puts were sold for .96 while 15K of the March 35 calls were bought for 1.69. This trade would profit greatly if the company trades above 29 in February and through 35 in March. Out of the money calls were purchased at the ask 96% of the time and puts sold on the bid 94% of the time which is a very bullish sign.

The Financial Sector ETF (NYSEARCA:XLF) early today saw some very heavy call activity as the June 12 calls were bought 30K times. In addition to this the 50K of the June 13 puts traded today but the trade went off at 1.07 and the bid was 1.06 and ask was 1.08 so direction is not totally clear. Watch this name as finanicals continue to try to move to the upside. Anyone who reads my articles knows I'm very bearish financials and will continue to be until the fundementals change.

Popular ETFs and equity names with bullish/bearish paper in terms of call/put ratios:

Calls outnumbering puts:


Steel Dynamics (NASDAQ:STLD) 14:1

American Electric Power (NYSE:AEP) 10:1

Puts outnumbering calls:

FTSE/Xinhua China ETF (NYSEARCA:FXI) 6:1

Dunkin Brands (NASDAQ:DNKN) 85:1

MetroPCS (PCS) 8:1

Volatility Explosion:

Computer Sciences (NYSE:CSC) saw some very bearish paper cross the options market today. All 10 of the largest option trades of the day were puts and all but one were bought on the ask. The biggest trade a January 2014 12.5 put was bought 2,500 times at the ask which would cut the stock in half if these puts paid off. There was previously no open interest in this strike and this is an opening transaction. Puts outnumbered calls more than 14.

Volatility Implosion:

Tivo (NASDAQ:TIVO) which has been mentioned in my last two articles once again today shows up but in a different fashion. IV30 imploded today, more than 28% after AT&T (NYSE:T) decided to settle with the DVR service provider for more than $250 million. This leads to an interesting possible trade for people with IV being so low, straddles could be a good buy down here.

Other Options Action:

Yahoo (NASDAQ:YHOO) saw more than 3.5x options activity on the call side. Although not completely clear in terms of bought/sold some interesting 1:2 ratio calls were purchased on the 16/19 July line. This appears to be bullish for YHOO but does believe resistance around 19 would kick in hard. Calls outpaced almost 7:1 on the day.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.


I am long AGNC, NLY, SDS.


I have WDC on my radar and may do a risk reversal in the next 72 hours.

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.