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VIX - Market Sentiment:

First and foremost I would like to address a ton of questions I received last night off my Wednesday recap story. Questions were asked as to why the VIX settled at 23.64, up so much from the previous close on Tuesday. I honestly cannot answer this question but I can tell you what I believe happened.

First if you look at Tuesday the spot VIX traded at 20.80 (ISH) which would have been absolute hell for those traders who were short the 250K contracts of the 24 and 25 VIX puts if it settled there. If you look at the IV of the options prior to Wednesday settlement IV screamed up in the calls suggesting a move higher. For example if the VIX would have settled at 20.64 the writer of those puts would have needed to pay out an astounding additional 750M in premium vs the 23.64 settlement. Remember the VIX settlement is the "first print" of volatility as it relates to SPX option premium and thus at the open even though the market was only down .2% the VIX did open up 6% which is way out of the norm.

My only explanation for this .. it was cheaper for the VIX put writer to put in a ton of buy orders for the SPX puts causing VIX to spike to withdraw the orders, allowing it to fade into yesterday's rally. Many people believe large players manipulate the VIX where they need it to go and yesterday's VIX print does not help to refute this claim.

Thursday was an extremely interesting day in the S&P futures. Although a fairly tight 10 handle range they went up and down with the news almost to the second. Long hated by this trader stocks Bank of America (BAC) and Morgan Stanly (MS) reported sending futures back to the highs of 1309. Although BAC missed estimates traders ate up the stock in the pre buying it up to the 7.30 mark. This was prior to the absolute flood of economic data which came out at 8:30. Core CPI and building permits came in right inline but unemployment came in 35K lower than expected which again sent futures back to highs. However, the weaker than expected CPI and housing starts put somewhat of a cap into this moving into the open.

The CBOE Volatility Index (VIX) continued its downward trend toward the 20.00 level as more stability continues to come back into the market. The VIX attempted to break the 20 level going into midday trading but failed to do so, at least initially. The VIX was able to crack that 20 level but then recovered toward the end of the day. A few larger call purchases came in today into the VIX where the Feb 32.50's were bought 8.6K times for .65 and the Feb 23's were also bought for 2.20. This is probably nothing more than cheap hedges against a market pullback at this point.

Today the trade which caught my attention was the March/April Risk reversal calendar. The March 22 puts were sold 67K times and the April 28 calls were bought 67K times. Calls were bought around 3.05 and puts sold for 1.80 for a net debit of 1.25 costing the trader north of 8.3 million to put on the trade. This is nothing more than a very large be volatility will come back before March and continue into the April time frame.

Options Paper:

Sara Lee (SLE) saw the most incredible call to put ratio today trading 37,000 calls for every one put. Into the noon hour more than 222K calls had traded in comparison to only six puts. This appears to be a bullish call roll in massive quantities. SLE has been on the sonar in weeks past showing buying of the 20 strike calls and today is no different. The Jan 19 and April 19 and 20 calls were extremely active in today's trading. Option volume was more than 55x normal daily volume.

Electronic Arts (EA) on the other hand saw a massive rush to the February 17 puts bought more than 23K times. These puts go up against 2.8K open interest and was bought at the ask showing an opening transaction. Game makers have been weak of late and it appears as if this trader believes EA is set to take a leg down from here.

The iShares Russell 2000 ETF (IWM) saw some massive put buying today when the three largest trades of the day were all very bearish. Today the March 75-70-65 put butterfly went of 20K-40K-20K times. The second biggest trade was a Feb 78-72 put spread 6.4K times. The final trade was a March 75-65 1x2 which also is slightly bearish. It appears as if some traders believe we may have run our course here and are looking for protection. Puts outnumbered calls almost 2:1 with net premium much higher on the put side than call side.

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

Calls outnumbering puts:

Blackrock (BWC) 654:1

Newell Rubbermaid (NWL) 67:1

Hertz (HTZ) 294:1

Siemens (SI) 47:1

Credit Suisse (CS) 38:1

PMC-Sierra (PMCS) 84:1

Puts outnumbering calls:

Safeway (SWY) 79:1

BHP Billiton (BBL) 143:1

Quest Diag (DGX) 24:1

Newfield (NFX) 11:1

Omincare (OCR) 41:1

Volatility Explosion:

American Superconductor (AMSC) continues to see implied volatility explode to the upside. Today however the move was caused by calls being sold 46% of the time and puts being bought at the ask more than 90% of the time. This is extremely bearish for this stock as IV continues to rise, showing increased buying pressure for puts. Option volume was more than 6x normal average daily volume

Volatility Implosion:

Molycorp (MCP) IV continues to slide and again today IV continues to collapse. The almost strait up move in MCP shares have bulls and bears at a pretty much stand still. My play here is nothing directional but a strait out volatility play. I today bought the MCP 29 February straddle for 4.00 expecting for any type of price movement or return of volatility for this trade to profit. IV30 is now a full eight points lower than HV and I am looking to capitalize on a movement back to the norm.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.

Disclosure:

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

I am short: SIAL, JNY, RAX, LNKD, AMZN, TMO, MU, AA, EWG, KWK, PBI,

I own Straddles: MCP

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.

Source: VIX - Options Volatility Sonar: Thursday Recap