VIX - Options Volatility Sonar: Wednesday Recap

by: Erick McKitterick

VIX - Market Sentiment

Wednesday S&P futures traded down 7 handles on weak flash PMI numbers out of Europe. Combined with a poor existing home sales number and poor earnings recently out of Dell (NASDAQ:DELL) and Wal-Mart (NYSE:WMT) our markets were weak going into the noon hour. The S&P traded right down to the accelerated uptrend channel on the 10-day moving average and bounced.

This move was somewhat telegraphed from the CBOE Volatility Index (VIX). Even trading down to the 1355.53 level the spot VIX reaction remained muted. Only toward the close did the VIX begin to perk up as well as the VIX futures which sold off even with spot rising. This kills those long volatility ETFs (NYSEARCA:VXX) and 2x volatility (NASDAQ:TVIX) as the futures continue to come down off of last week's high.


March VIX futures 22.58

April VIX futures 24.95

May VIX futures 26.05


March VIX futures 21.95

April VIX futures 24.63

May VIX futures 25.68

Even with spot VIX closing flat today the overall futures traded down which is why TVIX and VXX continued to get punished in a relatively flat to down market. VXX puts as reported on yesterday's sonar continued to be bought today as people continue to believe this market is set to rally yet further. With volatility down at these levels players could sell weekly S&P 2x short ETF (NYSEARCA:SDS) calls against further out month calls. I personally like the April 16 calls for 1.00 and selling the weekly 17 or 18 against it to collect weekly premium but stay hedged to the downside.

Options Paper

Yesterday a very large trade in the S&P cash went off where a single 50K block of December 2012 calls were sold for 71.00. These calls were bought back on November 18th of last year for 50.50 (252M) pocketing the buyer of these calls more than 100M in pure profit. Less than 20 minutes later a block of the 1450 December calls went off 50K times but the interesting part here is it appears they could have rolled but which side. The 1450s went of for 47.70 with the spread of 48.30x50.90 at the time which would indicate a sold or a bearish bet. However, some people following appear to have followed long here so it's tough to tell. Overall some very big sticks have been swinging 250M trades hot and heavy in SPX cash recently and it appears we could be in store for some wild moves.

Many people messaged me regarding General Electric (NYSE:GE) which traded more than 2.75M contracts today, which would appear to be extremely bullish. However, this is nothing more than market makers playing a dividend play trying to "steal" the dividend buying in the money calls and immediately exercising them to allow them to hold GE for ex-dividend and move the paper later. Calls outnumbered puts more than 66:1 today but this is overall meaningless for directional traders as it has no specific "tell."

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

Calls outnumbering puts:

Honeywell (NYSE:HON) 51:1

Assurant (NYSE:AIZ) 80:1

Adtran (NASDAQ:ADTN) 83:1

Saks Inc (NYSE:SKS) 31:1

ISIS Pharma (ISIS) 28:1

Activision (NASDAQ:ATVI) 26:1

Puts outnumbering calls:

Swift Energy (NYSE:SFY) 57:1

Ameritrade (NASDAQ:AMTD) 34:1

Royal Bank of Scottland (NYSE:RBS) 14:1

Leucadia (NYSE:LUK) 9:1

Jefferies (JEF) 8:1

Owens Corning (NYSE:OC) 7:1

KB Home (NYSE:KBH) 6:1

Safeway (NYSE:SWY) 5:1 (Large number of puts bought into the close)

Volatility Explosion

Netflix (NASDAQ:NFLX) yesterday broke key levels and today followed through with increased downside and volatility. Yesterday on the close below the 118 level I went short and exited today. Bears and bulls battled it out today but overall net premium shows overall calls sold and puts bought today. Nothing off the charts but option volume was more than 2x average daily volume with puts almost 1.5:1 over calls. I re-entered a small NFLX short into the close.

Chelsea (NASDAQ:CHTP) today saw share prices fall off a cliff after FDA concerns slapped the stock more than 9%. IV30 screamed to the upside climbing another 7.6% to an incredible 301% volatility. This is another new 52 week high for implied volatility. Option volume was more than 8x average the daily volume with calls outnumbering puts 3.5:1. The interesting part is of the 17K calls which traded 13.2K were bought at the ask or 77%. The March 4 and 5 calls were being bought across the board and one large 9.3K trade went off at 1:05 just to be busted and then re-issued at 1:10 showing again buyers of the calls continue to believe this name could rebound. With IV this high this is probably a home run stock ... either it's going to rebound hard and IV comes in or could go the way of other stocks getting slapped down to the sub 1.00 level. Keep your eye on this moving forward as it appears the short term bulls just won't give up on this name.

Volatility Implosion

Garmin (NASDAQ:GRMN), and Chico's (NYSE:CHS) both saw IV collapse today after better than expected results on both accounts. Put sellers came out in full force as premium was released and some moderate call buying also came into these names. GRMN saw more than 45% of the 10K total call volume bought on the ask. Chico's was also bullish but not as much as puts were bought more than 51% of the time and call spreads were very popular as people continue to roll out bullish positions. Overall CHS had more than 12x average daily volume with GRMN trading only 4.5x.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.


I am long SDS, APC, 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.