VIX - Options Volatility Sonar: Wednesday Recap

Jan.11.12 | About: iPath S&P (VXX)

VIX - Market Sentiment:

Wednesday the stock futures range was fairly tight until around 5 a.m. when the German DAX topped out. The futures only initially moved 8 handles which lines up directly with how the spot CBOE Volatility Index (VIX) performed Tuesday. This yesterday really concerned me as I really feel the spot VIX should have dropped below the 20 level.

The S&P ETF (NYSEARCA:SPY) opened down slightly to the 128.75, but more interesting here was the rush for puts on both the SPY and Nasdaq ETF (NASDAQ:QQQ) This action was reflected in the VIX as spot VIX climbed 2.5% and front month VIX futures climbed almost 2% in early trading. This was also confirmed in the popular Volatility ETF (NYSEARCA:VXX) as it traded up 1.5% on the rise in the futures.

Into the noon hour of trading the S&P began a slow melt up back to near even but yet the VIX remained elevated. The interesting VIX trade of the day thus far was actually near the open. A 33K print of the VIX Jan 24 puts traded dead smack in the middle between bid and ask. Considering OI is 197K in this name if these were sold I would expect the OI to drop tomorrow but only time will tell. I believe these were more than likely sold since a buyer of 6.4 million worth of additional contracts probably would have had the Jan. futures lower.

Options Paper:

Industrial Select ETF (NYSEARCA:XLI) saw some initial heavy bearish paper flow direct into the February 35 puts. These puts traded more than 28K with 74% bought on the ask. 10:00 showed a large single block of almost 15K of these puts trade which was followed up by additional buying of this same strike afterward. This is a direct bet as there appears not to be a short strike on the downside. Odds are it's a short term bearish hedge or bet which would pay off handsomely in a correction where the trader would either take off the position or spread it out at a later time. These large blocks were followed up later in the day with Feb 34/32 put spread buyers. Watch this name for a possible reversal as it has been extremely strong of late.

Storage Giant (NYSE:EMC) saw a large rush of April 21 call buying. The April 21 calls which only have 2.3K of open interest saw 5,000 options trade paying up to 1.82 for the options. These options follow continued put selling as 51% of all puts were sold on the bid in comparison to 72% of calls bought on the ask. This is a very bullish ratio and combined with the positive net delta and net premium it appears bulls are looking to ride this one higher. EMC is a name I like and will look in the future to follow this trade on a pullback.

Hertz (NYSE:HTZ) today saw a bullish call roll. Early in the day the March 7 calls were sold 9,500 times and then rolled a portion of the position to the Jun 11 call strike 6,900 times, give or take a few shares. The 9,553 shares sold in one block for 5.75 and were purchased over the last six months between 3.30 and 4.00. The trader then took the ~5.5 million he collected from the sale and bought 6,891 of the June 11 calls for 2.65, leaving 1.8 million ride. This bet is basically taking the original purchase price off and letting nothing but the profits ride from here. Because the calls are already almost 2.00 in the money this trade will move heavily with the price of the underlying moving forward. At one point calls outnumbered puts 490:1 in this name.

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

Calls outnumbering Puts:

Credit Suisse (NYSE:CS) 17:1

NYSE Euronext (NYSE:NYX) 43:1 (Covered call rolls)

Jefferies (JEF) 37:1 (Dividend Theft no play here)

ReneSola (NYSE:SOL) 26:1 (Crazy vol here be careful)

Puts outnumbering Calls:

MetroPCS (PCS) 20:1 (Bears looking to pile on?)

Materials ETF (NYSEARCA:XLB) 14:1

Healthcare ETF (NYSEARCA:XLV) 26:1

Volatility Explosion:

Hecla Mining (NYSE:HL) saw more than 22% of its share price come out as the stock sold off and IV gained more than 19%. The most interesting part about this is the biggest trades of the day were the buying of the HL 2014 5 straddle for 3.40. The call put ratio as well as net deltas and premium all were dead, even flat, with it appears some people were selling short term volatility (straddles) and buying longer term. The only directional bets were a rush for the Feb, March and Jun 4 puts which were bought in 300 blocks between 9:53 and 11:20. Regardless someone believes this thing will move between now and 2014 (big shock there).

Volatility Implosion:

Supervalu (NYSE:SVU) Wednesday lowered guidance through a pre-announcement and both the stock and IV dropped like a rock. SVU traded down 12% on the day and IV30 was crushed by more than 30%. This type of drop normally increases volatility. But in this case the pre-announcement gives a more realistic target and thus people selling their hedges and dropping call speculation, thus why IV appears to have been crushed.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.

Disclosure:

I am long AGNC, SDS, APC, WBMD

I am short: SIAL, JNY, RAX, LNKD, FINL, AMZN, TMO, SWY, MU, INTC, AA, EWG

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.