VIX - Options Volatility Sonar: Friday Recap

| About: JPMorgan Chase (JPM)

VIX - Market Sentiment:

Well, that was fun! Today the market woke up to futures up with S&P futures trading up to the 1295 range and again began to fade. Then JP Morgan (NYSE:JPM) sold off after reporting an inline quarter and futures followed this down hard in combination with the Euro debt downgrade rumors.

The CBOE Volatility Index ((.VIX)) opened up signaling a rush to safety as traders bought puts across the board to protect positions. The volatility ETF (NYSEARCA:VXX) rallied well as the front month VIX futures jumping at the open. However, as noted in yesterdays recap, the SPY puts and Ultrashort S&P (NYSEARCA:SDS) calls outperformed by both VXX and VIX calls are starting to get even more interesting. The most interesting part here in my mind is the fact even as the S&P ETF (NYSEARCA:SPY) recovered nicely off of the lows the VIX actually held going into a 3 day weekend. This has me skittish and I bought the 18 January SDS calls as a hedge to my longs.

The CBOE was right to pop at the open as it turned out the Eurozone rumors were true as S&P will be downgrading France. Rumors continue to exist regarding possible other country downgrades. Europe fears appear to have come back into the market so get ready for an interesting short week of trading next week.

Options Paper:

So on Wednesday I wrote an article (here) highlighting the divergence between Treasury ETF (NYSEARCA:TLT) performance and SPY. Today on this sell off a very large single print March 117-113-109 put butterfly. This butterfly was bought 62,000 x 124,000 x 62,000. This is a rather large bet on this pop in TLT that a reversion to the mean will occur between now and March expiration. The single 3.1M trade will profit more than 21M if TLT drops to the 113 level. This 6% correction would signal money rotating out of treasuries income and back into equities. I played a variation off of this by buying the Inverse Treasury ETF (NYSEARCA:TBT) synthetic stock. I sold the 18/14 March put spread and bought the 18 call spread. I will look to roll this out somewhere in the future to a 18-21-24 call fly and cover the put spread. TLT traded 15:1 puts to calls on the day.

Recent IPO Pandora (NYSE:P) today saw a relative high number of calls being sold. Today almost 7K of the calls traded and 4,110 of the calls were sold on the bid. Although the calls outnumbered the puts 12:1 which would look bullish for this stock the price action says otherwise. 3,100 of the calls were sold believing P has limited upside from here.

Walgreens (WAG) saw a very large 18.2K collar rolled out to April. This is a very large shareholder who continuously sells covered calls to buy puts. Today the Jan 31 call was bought to cover and the Jan 28 put was sold to close. This large position actually was net positive, with the stock down more than 1.00 since putting the trade on. Now it appears the trader is looking for WAG to possibly have additional issues as the puts were rolled up and calls rolled down in price. The April timeline has plenty of time but is still bearish none the less.

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

Calls outnumbering puts:

  • Duke Energy (NYSE:DUK) 16:1 10K in large call diagonal
  • Targacept (TRGT) 157:1
  • TriQuint (TQNT) 17:1
  • Clearwire (CLWR) 19:1

Puts outnumbering calls:

  • Liz Claiborne (LIZ) 21:1
  • Adobe (NASDAQ:ADBE) 17:1 10K 26 puts bought in single block above ask
  • TDAmeritrade (NASDAQ:AMTD) 8:1
  • Masco Corp (NYSE:MAS) 12:1

Volatility Explosion:

Today if you blink you missed it when Tesla Motors (NASDAQ:TSLA) dropped an insane 18% after news came out senior staff were leaving the company.

Volatility skyrocketed as the share prices were shredded more than 20%. Upon this alert I acted when the January 22.5 puts went from a ask of .10 to 1.25 in a matter of seconds. Once the bid crossed the 1.00 I shorted the 22.5 puts trying to collect the volatility premium. This obligates me to buy TSLA stock effectively at 21.50 if TSLA continues to slide. I will more than likely be covering this position if volatility comes in on Tuesday for a trade.

Volatility Implosion:

JPMorgan (JPM) today saw its implied volatility come in hard today when it reported an in line quarter. The interesting tell (if there is such a thing) wasn't in ratios or specific block trades but overall 49% of puts were bought on the ask in comparison to 36% on the call side. Interestingly Citibank (NYSE:C) and Bank of America (NYSE:BAC) also traded many puts at the ask showing additional concern. JPM traded as expected traded more than 2x normal option volume today after the announcement.

Speculative Play Friday:
This weeks speculative play Friday stock I'm highlighting is beaten down Sequenom (NASDAQ:SQNM). This stock is probably an all or nothing play as it comes to winners. SQNM traded almost to 9.00 in 2011 but has been taken out to the woodshed of late. In December it traded way down in the 3's but since has come back strong. I do like their early down's syndrome screening product and do believe this could be a long term winner if it does well. Although too early to tell this could also be a target for any big pharma company looking to move some cash as a buyout target. I personally like the January 2013 5 synthetic stock options trade. You can sell the Volatility in the January 2013 puts for 1.60 and buy the January 2013 call for 1.10. My target here is to get paid ~.50 for the trade. This effectively would allow you to collect a credit of .50 and hold the trade through January of next year.

Price at Expiration - Profit / (Loss) per contract
0.00 - (450.00)
2.50 - (200.00)
5.00 - 50.00
7.50 - 300.00
10.00 - 550.00

I currently do not have a trade on SQNM but will be looking to enter such a trade somewhere in the future.

As always, happy trading and stay hedged. Remember, equity insurance always looks expensive until you need it.

Disclosure:I am long AGNC, SDS, APC, GOOG. I am short: SIAL, JNY, RAX, LNKD, AMZN, TMO, MU, 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.