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VIX - Market Sentiment

Friday saw a yawner of a pre-market with the S&P futures only moving 5 points top to bottom. Digestion for this market is probably pretty good here as we continue to build floor after floor of support for the S&P. Core CPI numbers were released and were lower than expected but just like other days it appears investors just do not care at this point. The accelerated uptrend remains intact and we are not even threatening the 10-day moving average currently sitting at 1373.

The spot CBOE Volatility Index (VIX) continued to melt away. An initial pop in VIX futures made volatility ETFs (VXX) and 2x volatility (TVIX) jump and follow the same trend lower as the markets were flat. The March VIX puts were active today especially in the front month. Buyers of the VIX March 15 puts came in heavy today with more than 25K contracts trading and 70K contracts on the 17 line suggest traders expect to see front month futures collapse between now and next Wednesday settlement. This would be very bad for VXX in the short term if this did come to fruition as more than likely the back month futures will not collapse as much similar to how they performed today. VIX futures are listed below.

Yesterday

March VIX futures 17.13

April VIX futures 21.63

May VIX futures 23.60

Today

March VIX futures 16.50

April VIX futures 21.33

May VIX futures 23.55

Options Paper

Apple (AAPL) straddle and strangle sellers yesterday made some serious bank after March volatility plummeted today. The 585 straddle yesterday traded north of 10.00 and into the noon hour saw this come in more than 70% down to 2.60 bid. The volatility in this name has been crazy doubling in the last two days just to have March volatility collapse hard allowing those sellers to make some serious bank. Today AAPL options came back down to earth only trading 800K moving into the 2:00 timeframe. Calls did outnumber puts today and unlike yesterday net premium is signaling calls once again being bought today as well as puts but almost 3x upside call inflows in terms of cash. As noted in yesterday's sonar the 675's were bid at 1.05 and even today continue to be bid at .38 as people continue to believe AAPL will continue the march higher.

Today touched a new all time high of 600.00 and today the net premium is decidedly bearish showing inflows into puts and outflows into calls. A large hedge fund is betting on even more upside after putting on a very large April 610 - 660 1x2 call spread. The majority of this went off at 9:55 today buying the 610s for 26.60 and selling 2x of the 660 calls for 12.50 for a net debit of 2.10. This trade would pay off greatly if AAPL were to run and rest at the 660 level prior to April expiration. Just the single print of this trade cost the trader 508K and could make 11.6 million in profit. Even with AAPL at these elevated levels and volatility screaming through the roof it appears some traders are looking for even more upside. AAPL already passed its daily option volume prior to the 11:00 mark and today is again well on the way to 1.25 M contracts again. As noted in yesterday's sonar report today AAPL again was trading at the time of this writing more than 10% of all contracts with calls outnumbering puts 1.7:1.

Iron Mountain (IRM) has been on the sonar a few times of late and today the bulls are at it again. A large 10K October risk reversal went off today selling the 25 strike puts for 1.25 and buying the 32.50 strike calls for 1.27. This only cost the trader .02 and will profit greatly with a move higher between now and October. This does lock up some serious cash so for those of you who don't like eating that much margin you could buy the October 20 put and save more than 2K in margin and buying power to keep your leverage high but cut your risk. Option volume is more than 6 times average in both strikes so this appears bulls continue to pile into this name. Options volume as one would expect in a thinly traded name like this was more than 22x average daily volume so if you enter a trade like this be careful because options are not very liquid with large spreads.

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

Calls outnumbering puts:

Flextronics (FLEX) 99:1

Savient (SVNT) 95:1

Vanguard Emergin ETF (VWO) 72:1

Aeropostale (ARO) 47:1

Globe Specialty (GSM) 46:1

Liz Claiborne (LIZ) 45:1

Commercial Metals (CMC) 44:1

Gap Inc (GPS) 36:1

Puts outnumbering calls:

Micron Tech (MU) 14:1 (Large number of puts sold so this would be bullish)

Deutsche Bank (DB) 8:1 (I've been wrong on this for 7 points now hopefully the 42.5 put buyer is right)

Fossil (FOSL) 5:1

Shutterfly (SFLY) 6:1

Crown Castle (CCI) 5:1

Yen ETF (FXY) 4:1

Volatility Explosion

Keryx (KERX) is a name which I highlighted a few weeks back after some bulls stepped in with heavy call buying pressure. I've been down to flat in this trade ever since but today options lit up again sending IV again sky high touching the 52 week high of 221 before pulling back slightly. Today calls and puts were both heavily bought with calls outnumbering puts 2:1. Options volume was also 2x average daily volume in this name as people seek both long and short protection from an upcoming announcement. More than likely this stock will either scream to the upside or drop into oblivion with the April straddle now priced at 2.75 ask. This is more than a 50% implied move between now and April expiration so strap on your seat belts.

Volatility Implosion

Perfect World (PWRD) saw IV collapse today after positive results has the stock moving higher in a big way. We have mentioned call activity on the sonar in the past and today those April 15 call buyers got paid. The stock jumped more than 29% as shorts ran for cover. The call buyers playing almost a triple are now bailing and rolling to some higher strikes but it appears some bears are also stepping in here buying 63% of the puts on the ask. The total option volume today was more than 14x average daily volume with calls outnumbering puts 2:1. It is important to note the largest trades were inflows of cash into puts. Keep your eyes on open interest for a potential move on this moving forward.

Speculative Play Friday

So with the last two plays one worked and one didn't making us now 9 for 12. Of course in my defense the Yahoo (YHOO) short I mentioned is still in a bearish pattern and the June puts could still very well work. My short on gold (GLD) has worked very well and I have taken profits and left this trade. This week's trade is one where I have many emotions wrapped up in and thus is either a home run or death.

Research In Motion (RIMM) is a common buyout rumor candidate which could be overall very positive for the stock. I, however, feel this stock has much more than a broken chart - it's a broken company. RIMM has fallen hard from the ranks of stardom with the rising of the AAPL iPhone and Google (GOOG) droid. The company had major outages last year, and when you combine this with subpar outdated equipment and gear I feel they will continue to head lower.

I am a user of both Blackberry and iPhone and personally I have never heard someone say "I can't wait for the new Blackberry." The RIMM playbook is a joke and this company receives major inflows from Europe and other foreign markets which have not been great either. Thus I am looking to make a bearish bet on RIMM. I like buying the April 15 put and selling weekly OTM puts and calls against it to reduce cost. I believe the earnings and more importantly guidance will be soft from RIMM which will more than likely put downward pressure on the stock.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.

Disclosure:

I am long APC, TBT, FAZ, X, KERX,

I am short: PBI, DB, AAPL, LYV, YHOO.

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.

Source: VIX - Options Volatility Sonar: Friday Recap