VIX - Options Volatility Sonar: Tuesday Recap

by: Erick McKitterick

VIX - Market Sentiment

On Tuesday the S&P futures were up initially as the markets continue to digest the recent downturn in equities. Although many indicators were showing an oversold condition, the market "bounce" was nothing short of pathetic. The S&P has now lost 85 handles since the start of May, again confirming the setups identified earlier regarding sell in May and go away. Tomorrow again the FOMC is center stage, so be ready for a potential violent day in the treasury ETFs (NYSEARCA:TLT) and 2x short (NYSEARCA:TBT).

Additionally, Wednesday is the May CBOE Volatility Index (VIX) futures settlement. As of Tuesday close the 22 spot VIX straddle was priced at 1.30 ask showing the expected print to be between 20.70 and 23.30. Open interest for option sellers would want a print near the 21.00 level. Volatility ETF (NYSEARCA:VXX), 2x ETF (NASDAQ:TVIX) and alternative 2x ETF (NYSEARCA:UVXY) all traded up today as VIX futures continue to inch closer towards backwardation and away from contango. These instruments will continue to become interesting as realized volatility has finally increased to a point where a 100% premium is no longer baked into the futures. This is perfectly reflected in the VIX futures shown below.


May VIX futures 21.60

June VIX futures 23.20

July VIX futures 24.40


May VIX futures 22.10

June VIX futures 23.80

July VIX futures 24.70

Options Paper

US Dollar ETF (NYSEARCA:UUP) saw a massive seller of the September 22 and 23 strike calls today. More than 130K of the 135K total calls today traded at these strikes. Both of these appear to have been sold, which would be a neutral to bearish trade between now and September. Today calls were more than 13x average daily volume and outnumber puts almost 33:1. With the calls being sold and puts 53% bought on the ask today, it appears some traders believe the strength of the US dollar is going to be muted in the upcoming months.

Avon Products (NYSE:AVP) today dropped almost 10% on very heavy volume after a takeover bid was withdrawn by Coty. Interestingly enough both bulls and bears were piling into this name today in terms of options. More than 27% of the 103K calls were bought on the ask and 40% of the 29K puts were bought on the ask, showing some expected big moves coming. Big buyers of July call spreads and October call spreads went off all day long. Calls outnumbered puts 3.6:1 on extremely heavy volume in this name today. Keep an eye for increasing open interest as this could be a tell for upcoming moves in the underlying equity.

Popular ETFs and equity names with bullish/bearish paper:

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

Rare Element (NYSEMKT:REE) 86% (Huge drop in this name looks like one trader is playing for a bounce)

Red Hat (NYSE:RHT) 76% (2.2K calls bought)

Delta Airlines (NYSE:DAL) 68% (Interesting as USAir saw large put speculation)

Morgan Stanley (NYSE:MS) 59% (65K calls bought OTM on the offer)

Hewlett-Packard (NYSE:HPQ) 39% (Interesting as I am looking to short this name prior to earnings)

MBIA (NYSE:MBI) 32% (Odd in a terrible financial tape)

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

Valeant Pharma (NYSE:VRX) 83% (Only 2K but still decent size speculation)

US Airways (LCC) 70%

News Corp (NASDAQ:NWSA) 64%

Dell Inc (NASDAQ:DELL) 51% (Bearish paper returns but terrible tape)

Jefferies (JEF) 51% (4K of the OTM puts bought)

Alpha Natural (ANR) 39% (More than 7.1K bought on the ask in an extremely weak tape for coals)

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

For those who are wondering, my articles have become less frequent as I continue to work on writing my options trading book. I apologize to those who continue to ask, but feel free to message me with any specific questions you may have and I'll try to answer them.

Disclosure: I am long APC, TBT, KERX, GLW, KGC, FIO. I am short: PBI, CMG, YHOO, JCP. I am long straddles: JCP. I am short strangles: JCP

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.