VIX - Options Volatility Sonar: Wednesday Recap

by: Erick McKitterick

VIX - Market Sentiment:

Wednesday S&P futures were poised to bounce after the terrible price action from Tuesday. Apple (OTC:APPL) was set for a press release to announce the new iPad 3 along with positive news out of Europe had the markets bouncing today. Price action moved to the 1347 level and then melted away resistance back to the 1353 level going into the final 2 hours of trading.

The spot CBOE Volatility Index (VIX) was crushed today moving below the 20 level again failing 7% on the day. I received numerous messages from individuals asking questions on volatility ETF's (NYSEARCA:VXX) and 2x volatility (NASDAQ:TVIX). Yesterday spot VIX was up 15% so thus one would think TVIX should have been up 30% on a day like yesterday. This unfortunately is not true, as TVIX and VXX prices off of VIX futures, not spot VIX.

The VIX is a stochastic number, and is not used in any trading instruments to my knowledge. To put it in perspective, the VIX is a measurement similar to RSI or any technical indicator which moves and indicates put buying pressure in the SPX. Because the VIX futures were up an average of around 3% yesterday, this equates to the gain of 5-6% in the TVIX. This is another reason I use TVIX only as day trades, as holding overnight can be very painful. Today VIX futures were down, and are listed below.

Yesterday (Tuesday)

March VIX futures 22.38

April VIX futures 25.18

May VIX futures 26.65

Today (Wednesday)

March VIX futures 22.38

April VIX futures 25.18

May VIX futures 26.65

Options Paper:

Kinross Gold (NYSE:KGC) was a speculative play Friday stock for me, which caught a double in the options a few weeks back. Today the bulls are back with vengeance, as more than 39K calls traded today with more than 70% bought at the ask. Large call buyers of the April 12 calls came in hot and heavy paying up in premium and also moving the stock up another 1.5%. The April 11 and 12 calls made up more than 90% of today's call buying, with the majority of calls being bought. Overall calls outnumbered puts 11:1 in this name and traded more than 4x average daily volume. I traded in and out of this name today, but will look to add on any type of continued pullback.

Financial ETF XLF saw a massive call spread go off today. In a single transaction at 12:21 the XLF March 15 calls were sold 70K times and the April 16 calls also appear to have been sold 70K times in a single block. This 140K transaction appears to have been sold as the bid of both of these at the time was .04. This single trade is more than 75% of the total calls, which accounted for XLF today driving net premiums way down and showing calls sold 84% of the time on the bid. Overall calls outnumbered puts 3:1 on the trading day. This is interesting in an up tape as the leveraged ETF (NYSEARCA:FAZ) saw heavy April call buying so this could be along the same thesis. Regardless check open interest tomorrow to see if this was just a bullish roll moving out and up to the April 16s, or if it was a new position. Current open interest is 400K in march and just over 100K in April.

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

  • Calls outnumbering Puts:
  • Alexza Pharma (NASDAQ:ALXA) 32K:1 (Yes 32K to only 1 put traded)
  • Duke Energy (NYSE:DUK) 366:1
  • Chico's (NYSE:CHS) 120:1
  • ON Semiconductor (ONNN) 102:1
  • Centerpoint (NYSE:CNP) 78:1
  • Oasis Petroleum (NYSE:OAS) 61:1
  • Rite Aid (NYSE:RAD) 41:1
  • CA Inc (NASDAQ:CA) 31:1
  • Newell Rubbermaid (NYSE:NWL) 29:1

Puts outnumbering Calls:

  • KBW Regional Banking ETF (NYSEARCA:KRE) 84:1 (Most puts sold on bid would be bullish)
  • Office Depot (NYSE:ODP) 20:1
  • Utilities ETF (NYSEARCA:XLU) 13:1
  • Junk Bond ETF (NYSEARCA:JNK) 31:1
  • Cinemark (NYSE:CNK) 17:1
  • Gannett (NYSE:GCI) 13:1
  • FactSet (NYSE:FDS) 9:1
  • Frontline (NYSE:FRO) 7:1
  • E-Trade (NASDAQ:ETFC) 7:1

Volatility Explosion:

Sina (NASDAQ:SINA) today implied volatility scream to the upside after large call buyers came into the market. Sina calls were bought at the ask more than 45% of the time today on almost 4x average daily volume. The April 75, 80, and 82.50 calls were all active with buyers of call spreads and butterflies running in this name. I've been hesitant to get into this name but price action is truth here and it appears option players believe the next leg is up. These March options will decay very quickly so spreads could be a much better play for those looking to get long this name. On the day calls outnumbered puts more than 2.5:1.

Volatility Implosion:

Pandora (NYSE:P) saw implied volatility collapse down to a 52 week low after reporting disappointing results last night. Bulls stepped up heavy into this name yesterday driving up call option premium as speculative plays and today they were running for the doors catching any bid they could find on the front month call options. Today net premiums were extremely bearish in this name as calls sold and puts bought overall. 46% of the 17,000+ puts which traded today were bought at the ask as long holders of stock ran for cover. Overall option activity was more than 8x average daily volume with puts just outnumbering calls.

As always, happy trading, and stay hedged. Remember, equity insurance always looks expensive until you need it!

Disclosure: I am long SDS, APC, TBT, FAZ. I am short: PBI, DB, EEM, AAPL, LYV, BSFT, GLD.

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.