VIX - Options Volatility Sonar: Thursday Recap

by: Erick McKitterick

VIX - Market Sentiment

Thursday was an interesting trading day as S&P futures were down across the board all morning until yet again a positive employment number brought up the futures and markets. Futures traded on the lows down to the 1334.30 mark and then quickly rebounded after a positive 14K employment surprise out of the labor department. Building permits and PPI numbers were flat to mixed, keeping somewhat of a lid on potential gains. The S&P ETF (NYSEARCA:SPY) today is trading below the 10 DMA for the first time at 134.87 which is a big pivot point for both bulls and bears. The bulls need to prove themselves just as much as the bears at this point as there have been three failures of the 1355 level.

The spot CBOE Volatility Index (VIX) has some interesting trading instruments here as popular volatility ETFs (NYSEARCA:VXX) and 2x Volatility (NASDAQ:TVIX) continue to be heavily traded. TVIX was up big in the pre-market before the employment numbers came out giving some relief to the recent run-up in VIX futures premium. VIX futures are as listed below


March VIX futures 23.80

April VIX futures 25.13

May VIX futures 26.98


March VIX futures 22.95

April VIX futures 24.50

May VIX futures 25.48

The markets rallied hard throughout the day causing the recent "rush" for volatility to subside. The ETFs for the Russell (NYSEARCA:IWM), Nasdaq (NASDAQ:QQQ) and S&P again saw puts outnumber calls as one would expect but the numbers are not as bad as the previous 7-8 days which suggests our next move could be to the 1370 level. This move is amazing as yet again we are above the 10 DMA and the run continues with bulls just not letting up. They really proved themselves today on an abysmal open moved back and based above the 1355 level for the first time in some time. If we hold this level it will be another close on the high and shorts could continue to get slapped. I personally trimmed shorts today closing half my AAPL butterfly for a 50% gain, leaving the rest of my position on at zero cost.

Options Paper

Apple (NASDAQ:AAPL) continues to scream in the options market. More than 1 million contracts traded yesterday. As stated on CNBC's Fast Money Wednesday this would be like trading 100 million of stock or 1 billion of a company with a smaller market cap. The option swings have been amazing and brutal for those on the losing side. Yesterday the sentiment of the options market changed dramatically just before noon which was the "tell" for AAPL if you ask me. Large February put buyers came in hot and heavy just 15-30 minutes before the more than $25 billion dollar market cap erasure from AAPL. 495, 500, and 505 calls were sold across the board between 33.00 and 28.00 respectively.

The traders in most cases then used these proceeds to buy massive amounts of puts at the 505, and 500 strikes mostly between .98 and .56. The calls they sold are now next to worthless and a simple 100 block 505 puts were trading for more than 145,000 when they were bought for just 7,500 yesterday. Nothing like a large 2,000% gain overnight to wet your whistle. Today again puts and calls are flying and no clear tell between calls and puts but net premium would suggest a slight to moderate bearish tone of 4.7M in net premium. The biggest trade of the day was a large collar with the October 600 calls sold for 16.70 and buying the 440 puts for 26.90. The trade went off for an amazing 1.5K contracts in two transactions within 20 minutes. This is someone who is long AAPL believing it will fill the 440.00 price gap long before it runs to the 600 level. Regardless AAPL is a trading vehicle unlike no other and will continue to be such. My article yesterday mentioned how to profit from AAPL's pullback using a butterfly which has now almost doubled in price. I have taken off the majority of my AAPL shorts when it bounced today at the 10-day moving average but my belief is it still goes lower from here.

E*Trade (NASDAQ:ETFC) today saw an interesting play with a seller of the March 9 straddle 20K times. This was a very large credit but is odd as current IV30 numbers are around the 40 level. Typically straddles are best sold or bought near 52 week high or lows of volatility readings. In the case of ETFC the low of 24 and the high of 110 remain and the risk in my opinion is to the upside for volatility. Regardless the trade collected a very nice .80 credit and will profit greatly if ETFC is between 8.20 and 9.80 on March expiration. This trade is a neutral to slightly bearish trade as ETFC gained .8% on the day, trading up to the 9.25 level. Option volume was more than 5x average daily volume.

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

Calls outnumbering puts

Sequenom (NASDAQ:SQNM) 112:1

ISIS Pharma (ISIS) 108:1

Marcerich (NYSE:MAC) 127:1

Fidelity National (NYSE:FNF) 214:1

Krispy Kreme (KKD) 59:1

NovaGold (NYSEMKT:NG) 38:1

Applied Micro (NASDAQ:AMCC) 379:1

Short ETF (NYSEARCA:SH) 28:1

Sirius Satellite (NASDAQ:SIRI) 18:1

Netgear (NASDAQ:NTGR) 19:1

Williams (NYSE:WMB) 2.6:1

Puts outnumbering calls:

LogMein (NASDAQ:LOGM) 50:1 (Puts sold hard after earnings release)

Pool Corp (NASDAQ:POOL) 8:1

Array Biopharma (NASDAQ:ARRY) 500:1 (Puts were sold possible closing transaction)

Noble Corp (NYSE:NE) 3:1

Technology ETF (NYSEARCA:XLK) 3:1

Kraft Foods (KFT) 3:1

Russell 2000 3:1

Volatility explosion:

Deckers Outdoor (NASDAQ:DECK) over the last five days has continued to perk up and today was no different. DECK has been on a tear moving from 79 to 89 in the blink of an eye. The interesting action today was a buyer of the March 80 puts today for 3.78 2700 times. This was part of a large buy run on puts around the 11:05 timeframe which caused volatility to spike and the stock to shed a couple points only to recover and head yet again higher. DECK reports on next week on February 23rd so this is positioning for a potential drop. Puts outnumbered calls almost 2:1 on the day on almost 3x average daily volume.

Volatility Implosion

Nuance (NASDAQ:NUAN), a play off of the AAPL juggernaut last week, was taken to the woodshed after reporting disappointing numbers and guidance. Since then implied volatility has died and continues to decrease at this point. Overall option volume has returned to normal but implied volatility continues to drop toward the 52-week low of 31.85. Sitting at 39 a few more ticks down and I will consider a straddle to play for a price or volatility move going forward.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.




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.