VIX - Options Volatility Sonar: Thursday Recap

by: Erick McKitterick

VIX - Market Sentiment

Thursday continued the same pattern as previous markets, trading slightly down early and then climbing into the open as "word of a Greek debt deal" floated across the markets. Some websites showed Greek demands threatening the deal while others reported Greece has reached a deal. Regardless this appears to have next to no effect on the markets as they continue their march upward. Helping the climb was yet another good unemployment number print of 358K vs. 369K expectations. The only downside was previous numbers were revised higher to 373K, up from 367K.

CBOE Volatility Index (VIX) futures climbed almost 3% yesterday as VIX call buyers and SPX put buyers moved the futures to the upside. The spot VIX has printed an amazing five weekly candles lower and this is the first week where we are showing any type of skittishness whatsoever. Volatility ETFs (NYSEARCA:VXX), 2x ETF (NASDAQ:TVIX), Proshares (NYSEARCA:VIXY) and Mid-Term VIX ETF (NYSEARCA:VXZ) yesterday performed somewhat well in a very positive tape. The real question on investors' minds is will we pause at 1350 or blow right through on our way to 1425. Today is the first time where VIX futures actually traded up on more of a percentage basis than spot VIX by a wide margin. Thus this is why holders of VXX and TVIX outperformed the other hedges today. The spot VIX has reversed hard which is what Bloomberg and CNBC cover. This honestly in my opinion is a moot point as the only thing which is important to these volatility ETFs is VIX futures as shown below.


February VIX futures 18.88

March VIX futures 20.80

April VIX futures 22.30


February VIX futures 19.85

March VIX futures 21.70

April VIX futures 23.08

The interesting part here is implied volatility is trading at almost an 80% premium to actual volatility. Why is this important? This means everything in S&P ETF (NYSEARCA:SPY), Nasdaq (NASDAQ:QQQ), and Russell ETF (NYSEARCA:IWM) puts - although they seem to be cheap - could be expensive in relative terms. We have not moved down and closed lower than .25% in almost 5 five weeks and thus these puts just appear to be rotting away for those long hedges.

Again market sentiment is very bullish but option markets are finally starting to show some bearishness creeping into the market. For the last five days puts have outnumbered calls more than 2:1 with 50% of ETF puts bought on the ask. This is up from 32% just a week prior so it appears as if some funds are protecting for potential downside. Some creative ways of hedging come into play here. The buying of a backspread or SPY put spread and then roll into a butterfly could be a great way to protect a long position or make an outright bearish bet.

Options Paper

Diamond Foods (NASDAQ:DMND), no stranger to the sonar report, saw share prices collapse more than 39% today before rallying back to the 24.00 level (If a 35% decline is a rally). Options were crazy off the charts today with interestingly enough puts being sold and calls being bought. Puts were sold more than 38% of the time on the bid and calls bought 37% on the ask. Although not crazy bullish this is overall bullish paper. Net premium and net delta numbers confirm this and crazy as it sounds DMND traded more than 123K worth of options today which is more than 15x normal volume. The most active strikes were the June 45, 50 and 55 calls all being sold hard early in the day just to reverse hard after the put sellers came in right after. Last week DMND saw some very heavy put buying going into this event which caused IV to spike hard. A put buyer of the weekly 35 puts just last Friday shelled out 125K to buy 1,000-plus of the 35 weekly put strike. Today these puts were unloaded for a cool 1.25 million and someone is going to have a nice supper tonight. Another buyer of 50 of the 31 puts just yesterday for .05 each turned 250.00 into 50K overnight. Regardless of the markets this name continues to be volatile even as implied volatility continues to come in with options premium.

Apple (NASDAQ:AAPL) is off and running hard today testing the 500.00 mark. Volume on this name crossed more than 1.3 million contracts which is more than 9% of total options traded today. Calls outnumber the puts in this tech giant, and options today were almost 2:1 but the sold on bid/ask is almost dead flat across almost all lines and strikes. Interestingly enough today the net premium shows a much different story. More than 24 million of upside calls were purchased today whereas the puts were sold taking out 3.4 million in the puts. The IV has screamed to the upside today climbing more than 15% from yesterday, now approaching 26%.

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

Calls outnumbering puts:

KBR Inc (NYSE:KBR) 80:1

Bank of Ireland (NYSE:IRE) 61:1

Anheuser Busch (NYSE:BUD) 68:1

AmerisourceBergen (NYSE:ABC) 33:1

Newell Rubbermaid (NYSE:NWL) 39:1 (Calls continue to build here)

Sara Lee (SLE) 115:1

Puts outnumbering calls:

H&R Block (NYSE:HRB) 24:1

Junk Bond ETF (NYSEARCA:JNK) 25:1

Retail ETF (NYSEARCA:XRT) 13:1

Russia ETF (NYSEARCA:RSX) 13:1

Allstate (NYSE:ALL) 8:1

Jefferies (JEF) 6:1

Yum! Brands (NYSE:YUM) 5:1

Volatility Explosion

Nuance Communications (NASDAQ:NUAN) saw large inflows of both call and put buyers today. Calls were more than 13x normal daily volume where puts traded almost 20x normal daily volume. Call spread buyers jumped into this name which follows strong bullish flows over the last couple weeks, waiting for the IV to move to the upside. I joined into the 33 calls bought and mentioned on the sonar for .40 and closed half today on a double. I plan to leave the remaining ride moving into earnings. As IV screamed to the upside those short calls came back into cover after NUAN again made a higher high in today's trading. Overall calls outnumbered puts almost 3:1 today but the net premium shows bears and bulls almost battling to a stalemate. Watch option pricing tomorrow as IV will more than likely collapse hard tomorrow as front month volatility averages over 100.

Volatility Implosion

Groupon (NASDAQ:GRPN) saw IV drop of more than 40% from yesterday now hitting a new 52 week low of 64% implied volatility. Today the option volume has been crazy high as option volume was more than 5x normal daily volume. Puts outnumbered calls more than 1.7:1 on the day with puts being bought 35% of the time and calls 29% of the time.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.



I am short: SIAL, PBI, FXE, DB

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.