VIX - Options Volatility Sonar: Wednesday Recap

by: Erick McKitterick

Wednesday S&P 500 futures traded once again saw a much tighter range than in the last couple days with just a 10 handle move prior the open. S&P 500 ETF (NYSEARCA:SPY) and NASDAQ 100 ETF (NASDAQ:QQQ) followed the futures trading towards the 130 range in pre-market just once again to hit a wall and fade into the open. The majority of the fade was due to weak US PPI numbers when they unexpectedly missed the projections of .1% and came in at -.1%.

Today is the settlement for The CBOE Volatility Index (VIX) January VIX futures. The VIX yesterday settled at 23.64 which is an interesting settlement considering how hard the spot VIX dropped at the open. This movement is important for the popular volatility ETF (NYSEARCA:VXX) as pricing will now adjust for front month futures being the February contracts currently having implied futures of 23.70 down .40 from yesterday.

This move down in the VIX propelled the market up past and through the 1300 level to the highs of the session. Interesting activity however was in the Industrial ETF (NYSEARCA:XLI) once again dominated by heavy put buying across the board. The Feb 35 puts have been extremely active of late as put spreads of the 35-33 and March put spreads have been off the charts. This is more than likely a hedge against long stock holders as the XLI has ramped up hard in 2012 allowing them to protect profits.

Options Paper:

Intel (NASDAQ:INTC) saw some large blocks of straddle buyers today. It appears some people are playing for INTC to continue to move up in volatility prior to tomorrow's earnings release. The majority of numbers are showing a very bullish tone to these numbers. The 25 straddle was bought 7K times today for .81 so we'll see if this trader keeps the trade on or if they take it off tomorrow. INTC traded more puts than calls today, but 43% of the calls were bought on the ask in comparison with just 25% of the puts. I took off my INTC short yesterday but still have a bearish tone personally on this stock as they did warn back in December.

Microsoft (NASDAQ:MSFT) has had some major bullish paper of late but today more than 60% of the puts were bought on the ask. Some people may be positioning for a potential drop to protect profits in the name due to upcoming earnings. This is in direct contrast to the insane bullish option paper which has been flowing into this name of late. I have no position in this name but for a tech giant who normally trades and moves in pennies to move like this pre-earnings tells me a pullback or fade could be in the works.

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

Calls outnumbering Puts:

Kohlberg (NYSE:KKR) 157:1

Pinnacle (NASDAQ:PNFP) 161:1

Avon Products (NYSE:AVP) 37:1

Leap Wireless (LEAP) 50:1

Mead Johnson (NYSE:MJN) 34:1

Tyson Foods (NYSE:TSN) 26:1

Puts outnumbering Calls:

Omnicare (NYSE:OCR) 20:1

Host Hotels (NYSE:HST) 6:1

Guess? (NYSE:GES) 5:1

Kohl's Corp (NYSE:KSS) 7:1

Utilities ETF (NYSEARCA:XLU) 9:1

Saks Inc (NYSE:SKS) 51:1

Volatility Explosion:

American Superconductor (NASDAQ:AMSC) saw implied volatility explode to the upside by more than 30% today. Both calls and puts were bought across the board but AMSC puts were bought more than 83% of the time at the ask showing a bearish sentiment. Watch this name going forward as it appears some bears do not believe this pop is for real and plan to fade this move. Calls outnumbered puts 1.5:1 on the trading day.

Volatility Implosion:

Tesla Motors (NASDAQ:TSLA) as reported in the report last Friday saw IV scream to the upside more than tripling in just over 35 minutes. TSLA since has seen IV implode as the price of the stock has recovered more than 18% of and has recovered 95% of the selloff from Friday. I have covered my short puts on this name with the IV move lower and recovery of shares. Goldman Sachs (NYSE:GS) came out with a price target of 35.00 helping this cause. Today option activity returned more to the norm as IV dropped down yet another 25% today alone.

Research in Motion (RIMM) mentioned yesterday in the explosion portion today saw option premium wither away after Samsung squashed rumors of a takeout. The IV of this in the front month options deflated big time and the sellers of those 17.5 calls yesterday came away today with a huge gain. The volatility will probably more than likely continue to drain from this name although people will begin to bid up options getting ready for a move into earnings if the IV drops too much. RIMM was down big at the open but then rallied with the rest of the market as the trading day went on.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it!


I am long AGNC, SDS, APC, ZSL, TBT.


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.