VIX - Options Volatility Sonar: Monday Recap

by: Erick McKitterick

VIX - Market Sentiment:

So this week has been an interesting one to wrap up. S&P futures traded higher throughout the day as Europe also traded higher as good news from General Electric (NYSE:GE) and Honeywell (NYSE:HON) lifted markets. This week saw a mixed bag of economic data as people continued to position both long and short.

The spot CBOE Volatility Index (VIX) typically moves down going into a weekend and the move today was fierce. Volatility ETF (NYSEARCA:VXX), 2x ETF (NASDAQ:TVIX), and alternative 2x ETF (NYSEARCA:UVXY) were punished hard as front month futures sold off sharply as call sellers once again returned. For those looking to hedge positions using market index collars make a ton of sense right here with volatility pulling back. VIX futures are below.


May VIX futures 20.70

June VIX futures 22.20

July VIX futures 23.50


May VIX futures 19.98

June VIX futures 22.00

July VIX futures 23.28

In contrast to recent rallies today the rally initially was confirmed by treasury ETF's (NYSEARCA:TLT) and 2x short (NYSEARCA:TBT). Although the market continues to send mixed signals I do believe the next setup is for the dreaded "Sell in May and go away". All of 2012 people have bought the dips and sold the rips and it has worked to give some enormous gains. However, price action of late has not been so kind and it appears as if some are preparing for a potential pullback. Of course this was not shown today as front month SPX put bids were dropping all day long.

Options Paper:

Apple (NASDAQ:AAPL) has had an absolutely wild week in terms of price action. Starting the week at 610 to have a drop to 570's open on Tuesday was just the beginning. Large option plays on Monday were mostly bullish and sure enough the .60 bet make 10K times turned 600K into more than 2.4M in one day as AAPL rallied hard back to the 620 level. During this time the bullish paper turned very negative and sure enough AAPL as of the writing of this was trading at the lows of the week. The 580-575-570 put butterfly went from .35 to a 4.25 bid as of the writing of this article. I was fortunate enough to ride AAPL for some decent profits this week but I will look to possibly put on some ratio spreads next week going into earnings to capitalize on the volatility. AAPL net premiums today was crazy bearish with almost 20M of calls being sold vs 6M puts bought. This is a very big divergence on very heavy volume. Although calls outnumbered puts 1.3:1 today remember the majority of calls were being sold. To end on a positive the largest trade of the day was a buyer of the January 700-750 call spread 2,361 times for 2.36M so just remember even on bearish days bulls are still bucking the trend. As of today my April put butterfly is now expired so I am no longer technically short AAPL, although I believe this quarter is going to be a prove thyself earnings quarter.

Smithfield Foods (NYSE:SFD) has seen some terrible price action and today one bear tripled down his bet. The May 22 puts were sold for 1.50 for a good size profit and the proceeds were used to buy 4K of the May 20 puts. This is a very large move as the trader is taking off very little here and leveraging up to the downside. This move was confirmed as price action was crazy negative and volatility exploded to the upside. Overall puts outnumbered calls almost 40:1 today in this very thinly traded name. I joined in on this and bought the 20 May puts as well attempting to ride with this bear lower from here.

Popular ETF's and equity names with bullish / bearish paper:

Bullish Option Flows / Percentage of Out of the Money Calls Bought On Ask:

LDK Solar (NYSE:LDK) 97% (Call roll on the 6 line)

Key Energy (NYSE:KEG) 95% (Bulls stepping back in here)

Staples (NASDAQ:SPLS) 93%

Barnes & Noble (NYSE:BKS) 71%

Nokia (NYSE:NOK) 58% (I don't like this one at all but could be very profitable)

DryShips (NASDAQ:DRYS) 46%

Bearish Option Flows / Percentage of Out of the Money Puts Bought On Ask:

Vera Bradley (NASDAQ:VRA) 93%

Regions Financial (NYSE:RF) 88%

Walgreen (WAG) 56% (Continued bearish flow here)

Symantec (NASDAQ:SYMC) 56% (No real reason here looks like speculation)

Alcoa (NYSE:AA) 47% (Appears some are trying to fade the AA earnings beat

eBay (NASDAQ:EBAY) 32% (Probably some people profits being used as insurance)

Speculative Play Friday:

So anyone who was still in my EBAY speculative play Friday call got seriously paid this week. EBAY beat numbers by a mile as the PayPal division continues to thrive. This week one trade which seems nice to follow is the bulls have really piled on in MGM Resorts (NYSE:MGM). This week alone has seen accumulation in the May 15 calls trading between .26 and .29 some 14K times. In addition to this puts were sold across the board this week as people continue to like these casino names. Although I breath caution to anyone looking to get long stocks going into May the 12-15-16 risk reversal could be beautiful here. Sell the May 12-10 put spread for .13 and buy the May 15-16 call spread for .12 for a net credit 0.01 on the trade. This trade would see profits with MGM above 11.99 on May expiration with profits capped above 16. Of course this trade does eat up some margin as 10 contracts will hold 2K of margin / buying power. Again I caution traders to look at everything when placing a trade if you are willing to own MGM at 11.99 (10% lower from here) then this trade makes a lot of sense. I have orders in for this but was not executed as of the writing of this article.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it!


I am long APC, TBT, KERX, GLW, KGC

I am short: PBI, SFD, 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.