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VIX - Options Volatility Sonar: Tuesday Recap

by: Erick McKitterick

VIX - Market Sentiment:

Tuesday, S&P futures were down modestly after pressure returned from Europe and the upcoming debt ceiling. Futures were taken down initially when SAP AG (NYSE:SAP) announced a terrible quarter after hitting a new 52 week high just 5 short days ago. Many on Wall Street believed SAP would announce a better than expected results, and instead, it missed on several key metrics. This news quickly hit European markets and dragged the Germany ETF (NYSEARCA:EWG) down along with U.S. futures. Futures did recover somewhat after Federal Reserve member Kocherlakota stated publicly that he wanted to see more stimulus brought to the U.S. economy. The seemingly never ending stimulus continues to hold equities near multi-year highs across the board. The NYMO shows the oscillator closed at +30.17, continuing to signal the market is in a mostly neutral state awaiting either a break higher or lower.

The spot CBOE Volatility Index (VIX) popped initially, almost kissing 14.00 before heading fading back to the lows of the day. Volatility ETF (BATS:VXX), 2x ETF (NASDAQ:TVIX), and alternative 2x ETF (NYSEARCA:UVXY) were mostly flat throughout the day, following futures almost step for step. Tomorrow is January VIX settlement, and is one of the most manipulated opens hands down, in my opinion. Tomorrow the seller of the 14 strike puts, currently holding 119K contracts, will more than likely try their hardest to pin at or near the 14 line. This will save them many millions if they bid up SPX puts at the open tomorrow, pushing the settlement anywhere near the 14 level. The ^VIX did trade more than 584K contracts today, with the February 17-14 put spread going off more than 55K times, following the action of 25K contracts mentioned in yesterday's Sonar (here).

Statistics and Screenshot Provided By LiveVol

VIX futures are below.


· January VIX futures 14.08

· February VIX futures 15.85

· March VIX futures 17.38


· January VIX futures 13.95

· February VIX futures 15.78

· March VIX futures 17.23

Options Paper:

The market Wednesday continued to show amazing resiliency, trying to regain the 1470 level. Rounding up the top 5 in options activity today was Procter & Gamble (NYSE:PG), S&P ETF (NYSEARCA:SPY), Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), and VIX Futures ^VIX. Although PG led SPY in terms of overall option activity, this is nothing more than dividend steals, which I mention time and time again in the Sonar reports. Other active names were Dell (DELL-OLD), Bank of America (NYSE:BAC), Ford (NYSE:F), Gold ETF (NYSEARCA:GLD), and JPMorgan (NYSE:JPM). Again, options activity on the market continues to be crazy bullish, with AAPL being the big exception. For those who follow me and my trades on Twitter, I have flagged the last 3 days heavy put activity on AAPL. The price action has not been encouraging for quite some time, and is exactly the reason why I exited my 600-700 AAPL call (stupid) when it popped to 550 earlier in the year. At one point, AAPL had 16M in net put premium bought today and more than 11M in calls sold, which is the most bearish options have been in over a year. AAPL does appear to have caught a bid around the 485 level and options sentiment is improving, but where it will go from here is anyone's guess.

Statistics and Screenshot Provided By LiveVol

Today, many traders were flagging the 10K block call order, which went into retailer Big Lots (NYSE:BIG). Today at 9:59 am, a large 10K block order was bought, buying the April 32.5 strike calls for .85 offer. This 850K call order is interesting, except they are leaving out one piece of this puzzle. At the same time, 8,201 of the January 30 strike calls were sold for .05. This appears to be a closing transaction of a bullish 320K bet placed back on December 13th. The calls were then purchased for .45 offer at the time, thus losing the trader 320K because BIG did not rally as he expected into January expiration. This investor is not giving up sinking another 850K believing BIG will run north of 32.5 before April expiration. Good thing for him BIG ran up more than 4.0% after the block call trade, seeing prices move from ~28.78 and almost touching 30.00 in today's trading session. The premium of these calls screamed to the upside, now trading 1.15 x 1.25, and making back almost the full 305K the trader lost from the December 13th trade. As I stated on Twitter, I'm not following this trade, but am keeping it on my radar to see how the position unwinds. Options activity was more than 11x average daily volume, with calls outnumbering puts more than 70 to 1.

Statistics and Screenshot Provided By LiveVol

Morgan Stanly (NYSE:MS) is a name that reports earnings before the bell on January 18th, and had bears and bulls battling it out today. Today saw large blocks of both call and put purchases, driving premiums higher across the board. It started with a large block buyer of the January 20.5 strike calls 10K times for .32 offer. This was then followed up with call buying of the January 20 strike calls in blocks as well. Then a large January 2015 22 strike block straddle was purchased for 8.30 a total of 3,150 times. This single trade, which equates to a 2.614M dollar bet, which would profit with MS above 30.30 or below 13.70 on January 2015 expiration. Options premium and volatility is being pushed by upcoming earnings, and one should expect options premium to increase as earnings inch closer. The options expected movement is currently pricing in a .88 - .96 move on earnings, so keep this in mind for those looking to initiate a trade. Options volume was almost 2x average daily volume, with calls outnumbering puts 1.5 to 1.

Statistics and Screenshot Provided By LiveVol

Popular ETFs and equity names with bullish/bearish paper:

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

Noble Corp (NYSE:NE) 63% of 16.3K OTM calls bought

Pioneer Natural (NYSE:PXD) 55%

PPG Industries (NYSE:PPG) 51% - Call rolls

CBS Corporation (NYSE:CBS) 49% - Calls have been very active in this name

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

Industrial ETF (NYSEARCA:XLI) 99% of 57K+ contracts bought on offer

Materials ETF (NYSEARCA:XLB) 987% of 61K+ contracts bought on offer

Health Net (NYSE:HNT) 97%

O'Reilly Automotive (NASDAQ:ORLY) 96% - Looks like longs protecting gains

Arcelor Mittal (NYSE:MT) 93%

Reynolds (NYSE:RAI) 81%

U.S. Steel (NYSE:X) 50% - Protective put buying?

Disclosure: I am long AGNC, APC, BA, EBAY, KERX, KOS, MTGE, NRG, PG, PSX, SWKS, VHC and short BWLD, DDD, FXE, NFLX, SPY.

Trades today: Bought EBAY risk reversal, closed LYV short, added to SPY puts.

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.

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.