VIX - Options Volatility Sonar: Friday Recap

by: Erick McKitterick

VIX - Market Sentiment:

Friday futures were extremely flat, barely moving all morning, until the wonderful jobs number released at 8:30. This was in direct response when the Non-Farm Employment numbers came in at 200K with economists only expecting 152K. The interesting part regarding this number was the revision down last month from 120K to 100K. Initially futures popped hard but faded fast into the open. The futures did however sell off after the pop.

The spot CBOE Volatility Index (VIX) slumped at the open as the S&P was flat but then perked up around 10:00 as some hedge funds began to bid up the price of protection and puts went up across the board. Throughout the trading session the S&P ETF (NYSEARCA:SPY) was in a fairly tight trading session throughout the day. An interesting trade today was a large buyer of the June 24-20-16 put fly. This fly was bought for 1.00 and would quadruple if the VIX in June pinned to the 20.00 level.

One trade which I found very interesting Thursday toward the close which could pose direction was large collar in the Russia ETF (NYSEARCA:RSX). RSX saw a massive 52K single trade 32 / 24 May expiration collar off. This trade sold the 32 calls for .70 and bought the 24 puts for 1.60, producing a net debit of .90. The 4.7M dollar bet is probably protecting a large position in this name to the downside. Regardless, keep an eye on this name moving forward as it could show sentiment toward the APAC region.

Options Paper:

Sara Lee (SLE) saw massive 10K call purchase in the July 20 call line. 10K of the July 20 calls were bought between .75 and .80. The 800K bet believes SLE will reach for highs not seen since 2005. I have a call spread order in below ask currently attempting to join this trade. SLE traded more than 20 calls for every put moving into the midday trading session.

Southwestern Energy (NYSE:SWN) today saw an interesting call roll moving the call forward in time. The February calls were bought and January calls were sold, showing the trader believes SWN will not be above 34 at January Expiration. This is an overall bearish bet so watch the price action to see if these option prints are correct.

Jones Group (NYSE:JNY) saw massive front month 10 puts trade throughout the day. As the price action continued to show weakness these puts were bought on the ask more than 86% of the time. In a name that only trades 250 puts a day today traded almost 6,400. Puts outnumbered calls more than 33:1. I decided to pile into this trade as well toward the end of the day, picking up the 10/9 January put spread.

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

Calls outnumbering puts:

KB Home (NYSE:KBH) 16:1

Seagate (NASDAQ:STX) 8:1

Whiting Petrol (NYSE:WLL) 11:1

Oncothyreon (ONTY) 10:1

Puts outnumbering Calls:

Computer Sciences (NYSE:CSC) 9:1 (Many purchased at ask showing bearishness)

Huntington Bancshares (NASDAQ:HBAN) 5:1

Abercrombie (NYSE:ANF) 5:1

Chico's (NYSE:CHS) 17:1

Volatility Explosion:

Hhgregg Inc. (NYSE:HGG) saw the IV30 explode 24% when more than 13x normal option paper crossed the wire. The majority of the smaller position regarding the calls were bought but the largest two trades were both January 16 calls sold at the ask. HGG popped hard on this news and volatility increased along with the stock price showing some skittishness to the rally continuing. Watch open interest to see how many of these calls and puts were actually bought to show future price action.

Volatility Implosion:

Best Buy (NYSE:BBY) again saw a large pop in price and today the price action dictated a large drop in IV30. Implied volatility dropped more than 20% as the stock rose more than 4.2%. Option volume was more than 2x normal and the put call ratio is close to 1:1. The largest trade was a 2K 22.5 - 21 put spread which went off just after the bell rang. This appears to be someone trying to collect .22 prior to January expiration if BBY stays above 22.5.

Speculative Play Friday:

Walter Energy (NYSE:WLT) is a favorite name of many analysts on CNBC and other news networks. As WLT has continued to be slapped in a down tape the options have been strong in this name. The ISE exchange since November has seen an abnormal number of call options being opened. This leads me to believe someone is playing for another takeover bid at this name somewhere in the future. I see headwinds from regulators continuing to add pressure to gross margins and overall profitability.

On the other hand if these regulations begin to back off or there are political shifts this once high flyer could soar yet again. I think a great play on this could be a call fly in the January 2013. The 75-100-125 call fly has a VERY wide bid ask but someone who is willing to wait it out could make some serious money. I believe buying this fly for 2.50-3.00 could profit greatly in the upcoming year. It would be a 10x play if WLT ran to the 100 level in the next year and I believe is a good risk reward play if you are bullish coal stocks.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.


I am long AGNC, NLY, SDS, APC.


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.