VIX - Market Sentiment:
Thursday saw an insane rush in the futures as S&P futures traded up to the 1297.50 level and then just flat out hit a wall. The total move in the SPX futures was just over 12 handles suggesting we could be due for some volatility. Overnight there was so many numbers out of both Europe and worldwide markets.
German Manufacturing Production -0.2% vs. 0.0% EST (Miss)
Europe Industrial Production -0.1% vs. -0.2% EST (Beat)
US Core retail sales -0.2% vs. 0.3% EST (Miss)
Retail sales 0.1% vs. 0.3% EST (Miss)
Unemployment 399K vs. 373K (Miss)
In reaction to this the S&P ETF (SPY) in the pre-market traded up to 129.99 then had a large rejection candle down on very heavy volume after the negative release of U.S. data mentioned above around 8:30. The SDS calls I have mentioned in several articles should perform well if volume picks back up and the market corrects. The CBOE Volatility Index (VIX) calls and volatility ETF (VXX) calls are starting to get interesting here but once again due to structure SPY puts and SDS calls will probably outperform them in the event of a sell-off. Although front month futures in VIX could be an interesting home run or strike out depending on where you think the market is going.
Into the noon hour of trading the S&P began once again a slow melt up back to positive and the VIX today unlike yesterday did not remain elevated going back to negative on the day. The market closed just 1 point off the high of the day which was confirmed bullishness as the spot VIX closed at the lows of the day. I bought the weekly SDS 18 call as a hedge to end the day.
Peabody Energy (BTU) is a favorite name of analysts but the energy sector has been slapped in 2012 thus far. Today a monster position was rolled at a loss from January to June to the tune of 19K contracts. Although this is a bullish trade you do need to look at where the roll came from. The 19K Jan 25 calls were accumulated in October and November at a cost of 14.45 to 18.20.
6K @ 14.50 = 8.7M
2.5K @ 15.60 = 3.9M
1K @ 16.00 = 1.6M
1.6K @ 17.00 =2.7M
2.2K @ 17.85 = 3.9M
3.1K @ 18.65 = 5.8M
1.1K @ 15.10 = 1.6M
1.1K @ 10.40 =1.2M
1.1K @ 9.30 = 1.2M
I estimate this trader over the course of nine significant buys bought ~30.6 million worth of call options in this energy name. (Give or take a million among friends) The trader realized a significant loss when the entire position was sold today for just over 20M, effectively realizing an approximate 10M loss. However, the trader isn't giving up as he took the 20M and used it to buy another $31.5 million 19,000 call option block at the June 20 call strike. This strike is more than 17.00 in the money and allows the trader to participate to the upside on any price move. As one would expect calls outnumbered puts in heavy fashion today but the call spread made up for more than 90% of activity.
For you are long time investors an interesting trade went off today in Limited Brands (LTD). LTD saw a 2014 January 33-40-58 2,400 contract risk reversal go off. The LTD Jan 2014, 33 puts were sold for 4.50 and the 58 calls were sold for 1.50. At the same time a 2,400 block of January 40 calls were purchased for 7.10. Net trade cost the trader 264K and holds ~8M in margin requirement to cover the short 33 puts. This trade has a maximum profit of 4.32M minus the 264K they paid for the trade. Net deltas and net premium have been crazy bullish in this name and this trade is no exception. I actually like this structure and may look to put this type of trade on in one of my retirement accounts.
Popular ETF's and equity names with bullish/bearish paper in terms of call/put ratios:
Calls outnumbering puts:
QLogic (QLGC) 16:1
Chimera (CIM) 62:1
Sealed Air (SEE) 35:1
XL Group (XL) 31:1
Lowes (LOW) 17:1
Puts outnumbering calls:
Michael Kors (KORS) 29:1
Prologis (PLD) 18:1
South Korea ETF (EWY) 19:1
Germany ETF (EWG) 11:1 (Most option activity was a short put spread not good for me)
Sears Holding (SHLD) was down big after a report from Bloomberg reported a potential halt in loans. This is very bad news for the already debt-heavy retailer. SHLD traded down more than 8% in the pre-market but recovered almost all of it toward the close. The IV of options again exploded as put buyers initially came in hard. IV30 popped more than 8 points and 9.5% on the day even after SHLD recovered. Puts outnumbered calls almost 2:1 in today's trading.
Walter Energy (WLT) mentioned here as my speculative play in last Friday's recap has rocketed up and through short term resistance. This is after several mentions on CNBC and again buyout chatter in this name. Today, implosion volatility did come in on the options, signaling to me some people are selling options and taking some profits as this may be a little overdone. Although I have no position currently in WLT any close above 64.03 the current top of the downward wedge would get me even more bullish 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.
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.