VIX - Options Volatility Sonar: Wednesday Recap

by: Erick McKitterick

VIX - Market Sentiment:

Happy New Year readers, the Sonar Report is back and ready for the new trading year. I hope everyone had a safe and happy holiday season. Wednesday, S&P futures were soaring after Congress agreed to avoid the "Fiscal Cliff." Not to rain on the rally parade, but some of the items in the bill were laughable at best. Most notably was the $1.6B given in subsidies for a new Goldman Sachs (NYSE:GS) headquarters, where it was granted $1.6B in tax-free financing. Other stories coming out of the bill were$ 9 billion in off-shore financing for banks to engage in lending practices and not pay taxes on income earned. Overall, the tax revenue bill will increase taxes $620B over 10 years, or ~$62B per year. This dwindles in comparison to the $1.1 trillion dollar deficit that we are currently facing, and I see this deal as a patch work at best. A check on the NYMO oscillator shows a massive rebound after a reading -39 just last Friday -- now trading flat. I expect the NYMO to be north of 25 if today can close strong, as the S&P has moved up 60+ handles in two trading days. Remember overbought would be 80, so the market could very well continue higher.

For those trading volatility products while I was off, it has been a wild ride. Today, the spot CBOE Volatility Index (VIX) collapsed back below 16 as the markets rallied hard on the "Cliff Deal." The oscillator, which moved north of 23 just three short trading days ago, is now back below 16 and has volatility longs crying. Volatility ETF (NYSEARCA:VXX), 2x ETF (NASDAQ:TVIX), and alternative 2x ETF (NYSEARCA:UVXY) were crushed today as players sold off front month futures hard. VXX, for example, was crushed down more than 10% in accordance with the front month futures sell-off and negative roll. Interesting VXX action, though, were buyers of the June VXX 19-17 put spread looking for a 400% gain between now and June, expecting the VXX collapse to continue. There were some buyers of calls today taking home more than $1.7M in net premium, but this is more than likely short call sellers taking profits. Volume was also heavy in the VIX pits today, trading more than 750K contracts versus just 490K average. Overall, large sellers of VIX calls and buyers of VIX puts dominated the trading today, selling calls on the bid 32% of the time.

(click images to enlarge)

Statistics and Screenshot Provided By LiveVol

VIX futures are below.


· January VIX futures 17.25

· February VIX futures 18.10

· March VIX futures 18.95


· January VIX futures 15.60

· February VIX futures 16.73

· March VIX futures 18.13

Options Paper:

The market hammered higher some 2% today, and the options pits were active as the traders came back from the holiday break. More than 19M contracts traded today, with a very heavy bias on the call side. Heavy option volume in S&P ETF (NYSEARCA:SPY), ^SPX, ^VIX, Apple (NASDAQ:AAPL), and Bank of America (NYSE:BAC) rounded out the top five option volumes on the market today. Also heavy volume today in NASDAQ ETF (NASDAQ:QQQ), Russell ETF (NYSEARCA:IWM), and Emerging Markets ETF (NYSEARCA:EEM), accounting for 1.4M+ contracts combined. As you would expect on an up 2% day, the options markets were incredibly bullish, with puts being sold and calls being bought in many names across the board.

One name receiving option runners was Zipcar (ZIP), which traded more than 17.6K contracts on a day it was up some 48%. Avis (NASDAQ:CAR) agreed to buy ZIP for $500M. Interesting action today was one buyer, who came in playing a cheap shot for an even higher bid, buying 3K of the February 12.5 calls for .10. Although this is more than likely a bullish bet, it could also be a short position limiting losses. Regardless, ZIP call buyers, although light last month, sure did get paid today, up more than 2,000% playing the January 10 strike calls. It had been noted in previous sonar reports the out of the money ZIP calls being bought, and this is exactly the reason I follow options. I wish I would have been in on this one, but it appears some bulls just won't quit in this name. It is noteworthy, however, that some players believe this name may not be set in stone, as puts were bought on the ask 59% of the time, or more than 4.2K worth, as people protected to the downside.

Statistics and Screenshot Provided By LiveVol

Other bullish paper today was big in energy names, with Energy Transfer Partners (NYSE:ETP), Cabot Oil (NYSE:COG), and Pioneer Energy (NYSE:PES) all having heavy call ISE sentiment. Heavy puts weighed down retail stocks such as TJX Companies (NYSE:TJX), Fastenal (NASDAQ:FAST), and Abercrombie (NYSE:ANF), all of which were seeing heavy ISE put paper. This follows the retail sector, which according to rumors, had a less than spectacular holiday season.

Popular ETFs and equity names with bullish/bearish paper:

Bullish Option Flows - ISE & % OTM calls bought on offer

Fifth & Pacific (FNP) 91% of the 5.5K calls bought on offer

Aeropostale (NYSE:ARO) 63% - Interesting in a very retail down tape

Western Digital (NYSE:WDC) 8.3K calls bought

Southwestern Energy (NYSE:SWN) 4.8K calls bought on offer

Elan Corp (NYSE:ELN) 47% of the 12.3K calls bought on offer

Bearish Option Flows - ISE & % OTM puts bought on offer

Cemex (NYSE:CX) 88% of 2.3K puts bought on offer

Dole (NYSE:DOLE) 78% of 10.9K

Humana (NYSE:HUM) 69%

Teradata (NYSE:TDC) 67%

Aruba (NASDAQ:ARUN) 65%

Star Scientific (STSI) 60%

Technology ETF (NYSEARCA:XLK) 58%

Disclosure: I am long AAPL, AGNC, AGQ, APC, KERX, KOS, MTGE, PG, PSX, VHC, and short FSLR, FXE, LYV, SPY.

Trades today: Closed AAPL call (stupid), closed SNDK.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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