VIX - Options Volatility Sonar: Tuesday Recap

Jan.10.12 | About: SPDR S&P (SPY)

VIX - Market Sentiment:

Tuesday saw heavy buying pressure in the futures which were up more than 14 handles today. As the S&P ETF (NYSEARCA:SPY) opened above 129.00 for the first time since late October the flow was very bullish. The interesting point more than anything was the price action in the CBOE Volatility Index (VIX).

The VIX died as a broad based rally took up the overall index ETFs like the Nasdaq ETF (NASDAQ:QQQ), Dow ETF (NYSEARCA:DIA) and SPY. However, in such a strong tape and what has been an incredible start to 2012, the VIX still could not break 20.00. As expected with such a gain the VIX futures sold off, causing the popular volatility ETF (NYSEARCA:VXX) to continue the recent slide.

Because we are coming up to VIX settlement just eight days away, the spot VIX is sucking down front month futures like there is no tomorrow. As these two come closer together now is a much better time to use these instruments to play potential moves. However, we are not there yet as people are looking for hedges. SPY and QQQ puts would more than likely outperform VIX or VXX calls. This is no better shown then around 13:20 EST large blocks of SPY 121-126 February call spreads were sold and at the same time 126-121-116 put fly was purchased.

Options Paper:

On an incredibly strong day in the markets option paper was flowing hard. Calls made up more than 60% of overall volume heading to the close. One name, Huntsman (NYSE:HUN), saw a nice purchase of February 9 calls. These calls are heavy in the money and will move pretty much in lock step with the price of the underlying with a delta north of .74. These calls have followed some pretty bullish paper into this name recently so it appears someone is looking for additional upside at this point. HUN calls outnumbered puts more than 10:1 on the day.

My speculative play stock from last week - Walter Energy (NYSE:WLT) - was slapped on Monday but Tuesday the price action was strong early and so was the option paper. WLT saw some heavy call buying early when the coal stock jumped to almost 60.00. During this spike IV increased more than 15% showing increased buying pressure in the options. On the day WLT calls outnumbered puts more than 3:1.

On the other side of the coin, Applied Materials (NASDAQ:AMAT) saw a "you shall not pass" trade today hit the calls. At 10:37 a single block of 72,500 July 12 calls were sold for .78. This generates a very handsome dividend ~6.5% protection for the seller of these calls between now and July. This seller believes the upside at this point would be limited and thus protecting the position and is willing to get called away above 12.78.

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

Calls outnumbering puts:

Polycom (NASDAQ:PLCM) 16:1

VeriSign (NASDAQ:VRSN) 33:1

DISH Network (NASDAQ:DISH) 33:1

Transocean (NYSE:RIG) 10:1 (9K Feb 45 calls bought on ISE)

Puts outnumbering calls:

Tesoro Corp (NYSE:TSO) 13:1

Oil and Gas ETF (NYSEARCA:XOP) 31:1 (Most sold suggesting bullish)

Gap Inc. (NYSE:GPS) 20:1

Kinder Morgan (NYSE:KMI) 11:1

Volatility Explosion:

Health Management Associates today saw IV30 scream up more than 29 points after the stock fell more than 20%. The interesting part of this was the call activity had more than 66% of the calls bought at the ask showing a possible bullish structure moving forward. However, on the flip side of this coin it could be shorts who are buying the calls as a form of a hedge to limit losses in the event of a rebound. The stock is heavily shorted and with the recent news and price action will probably continue. Watch to see as IV spiked hard for potential big moves in the upcoming weeks.

WebMD (NASDAQ:WBMD) saw share prices collapse when the CEO resigned and announced talks about the potential sale of the company had ended. WBMD traded down more than 35% at one point today, falling to 25.01 and bouncing hard. The interesting part about this was IV as expected shot up in this name. However the majority of the paper in this name was actually short term bullish. The Jan 25-30 1:2 ratio spread traded 2.45K by 4.9K believing on a short term rebound in the stock. For a trade I also entered this for a quick trade selling January 25 puts and bought the 25-30 call spread 1x2 for 1.35. I'm hoping for a quick pop or drop in IV and this trade should be profitable.

Volatility Implosion:

Oncothyreon (ONTY) today saw not an IV implosion but a slight decrease. The reason I mention it is the IV has skyrocketed so hard in the last few weeks. Front month IVs are sky high, showing a high level of probability this stock is going to move hard. ONTY has a lot of things going for it from the bullish side. FDA applications for potential cancer vaccines could have this stock soaring in the future. Call buying pressure has been elevated since Bristol Meyers (NYSE:BMY) announced it would buy Inhibitex (NASDAQ:INHX) for $2.5 billion. It appears bulls are looking to this as another potential takeout candidate. I have bids in for a leap risk reversal in this name.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.


I am long AGNC, SDS, APC, WBMD.


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.