VIX - Options Volatility Sonar: Tuesday Recap

| About: Netflix, Inc. (NFLX)

VIX - Market Sentiment

On Wednesday S&P futures traded down early as euro fears returned. Tech giant Apple (NASDAQ:AAPL) reported an absolute blowout quarter. The sonar report yesterday highlighted a very large institutional trader who looked to go very long into AAPL earnings and the trade now is profitable by more than 8 million overnight. I took off my 1:2 put and call ratio spread for a large gain. I sold for a credit of 2.75 and covered the spread for another credit of 3.25 today at the open.

The CBOE Volatility Index (VIX) popped hard in early trading, going above 19.50 but then traded down hard after the Fed statement showed it was keeping interest rates low until an incredibly long date of late 2014. The VIX futures traded down again across all spectrums after the Fed announcement. My concern with this "rally" is large call spreads were purchased today. The Feb 26 March 35 call spread went off for even money. This allows the trader to have huge leverage in the event of a huge market downturn between now and February expiration but then gives up protection and would be a huge penalty if the VIX was higher than 35 in march expiration.

February VIX futures 20.65 (down 1.30)

March VIX futures 22.65 (down .95)

April VIX futures 24.30 (down .87)

The futures action explains the huge selloff in the popular volatility ETF (NYSEARCA:VXX) today as the delta between February and March continues to increase.

Options Paper

Netflix (NASDAQ:NFLX) reports after the bell on Wednesday and the most interesting trade of the day was a large straddle 92.5 seller of the February options. The seller of the straddle collected 17.00 which would profit from NFLX between 112.00 and 77.00 prior to March expiration. This is probably nothing more than a volatility play as the increased volatility prior to earnings is always elevated. I also am in this camp with 1x2x2 long short short positions which I plan to take off tomorrow.

Beazer Homes (NYSE:BZH) saw a purchase of the of just over 3K February 2.5 calls for .80. This is a very bullish trade as these are highly in the money and will participate to the upside or downside almost tick by tick. Earnings on this stock come out on February 2nd before the bell so if this stock follows other builder stocks this thing could really rocket. I have no position but will look to put one on sometime in the future.

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

Calls outnumbering puts:

Moody's (NYSE:MCO) 83:1

El Paso Corp (EP) 43:1

Knight Capital (NYSE:KCG) 41:1

AOL Inc (NYSE:AOL) 24:1

McKesson (NYSE:MCK) 70:1

Puts outnumbering calls:

R.R. Donnelley (NASDAQ:RRD) 43:1

H&R Block (NYSE:HRB) 21:1


Industrial ETF (NYSEARCA:XLI) 10:1

Volatility Explosion

Acatel Lucent (ALU) saw implied volatility move to the upside when the stock lost more than 6.5% even in an extremely strong tape. Alu saw both calls and puts being purchased across the board and with this stock at these prices effectively they are bets the company will either be bought or go out of business. The March 17 1 calls were bought 1K times and the Feb 1.5 puts were also bought. There was also some buying in the Jun 16 1.5 puts but overall puts were more than 2x normal volume with 60% bought at the ask and 71% of the calls bought at the ask.

Volatility Implosion

Kodiak Oil and Gas (NYSE:KOG) saw IV come in huge after the energy stock flew up more than 5% in today's trading. Calls outnumbered puts 3.6:1 on the day with calls almost twice the normal volume. Although the biggest trades of the day were put buying these mostly seemed to be short put strikes buying back their shares locking in profits.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.


I am long SDS, APC, TBT, RIMM


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.