VIX - Options Volatility And Market Sonar: Wednesday Recap

by: Erick McKitterick

VIX - Market Sentiment:

Welcome to February VIX settlement Wednesday. S&P futures, as you probably guessed, continued to move higher on the back of President Obama's State of the Union speech. S&P futures again traded in a very tight pattern, moving from 1516 to 1520 in the pre-market. Strength and overall breadth of the market remains firmly in an upward channel. I did highlight some fundamental cracks that I see forming in an article (here) I released yesterday for those getting a little worried about the overall market. Shockingly, the eurozone continued to provide decent numbers as industrial output actually rose for the first time in four months. The move saw an increase of 0.7% versus a consensus of 0.2%. One key story not getting much love today, which worried me was global cell sales actually dropped for the first time in three years, down 1.7% to 1.75B units in 2012. Gartner blames the slip on tough economic conditions and competition. In other news, Comcast (NASDAQ:CMCSA) agreed to buy the remainder of GE's (NYSE:GE) stake in NBC Universal for $16.7B. This will more than likely give GE a $1B pretax gain from the sale of the division it bought some time ago.

As I mentioned on yesterday's sonar (here), I felt the most likely play for VIX settlement would be near the 13.00 level. Sure enough, again proving the VIX settlement is the most manipulated close of any futures contract out there, just like that, February VIX came in at 13.07. I was actually messaged by several traders, all with the same statement: "WTF" or "BS". Spot CBOE Volatility Index (VIX) opened at 12.88 and actually touched 12.67 before moving higher into the noon hour. For those unfamiliar with the VIX, futures settlement options are paid in the form of cash on the first VIX "Print" of the day. One would think this would be the 12.88 mark, but as I stated, the writers of the 121K VIX 13 strike puts and 140K 14 strike puts were not going to let that happen.

As I expected, SPX caught heavy put bids to begin the first 30 seconds of trading, and then were quickly pulled, helping to spike the VIX settlement price. One wouldn't think a move from 12.88 to 13.07 is a big deal, however, on just the 13 strike puts, it saved option writers 121.5K, saved them 1.5M in payouts, and the 14s saw a savings of 2.67M in cash. Going up, the put strikes from 15 all the way to 20 the small .19 difference saved option contract sellers an amazing 9.8M in cash positions not needing to be paid out. Thus, the total saved for put sellers in February was ~11M in premium not needing to be paid out to options holders for February settlement. Volatility ETF (NYSEARCA:VXX), 2x ETF (NASDAQ:TVIX), and alternative 2x ETF (NYSEARCA:UVXY) traded down early before recovering to slightly flat along with futures. VXX specifically traded in dead lock step with March VIX futures today, and was almost flat going into the final hour of trade. The VIX pits were very active today, as calls dominated the trading floor. Large 5K+ blocks went off all day today, with the May 18 strike calls and May 25 strike calls trading more than 115K times. Today, more than 5M in net call premium was bought, but the large call spread is very interesting, as it was not clear whether it was sold to open or buy to open from the customer standpoint. The trade cost someone 1.04, and the 10M bet sure will be interesting moving forward, considering the typical "Sell in May and go away" mentality.

Statistics and Screenshot Provided By LiveVol

VIX futures are below.


· February VIX Settlement 13.07

· March VIX futures 14.85

· April VIX futures 15.80


· March VIX futures 14.78

· April VIX futures 15.78

· May VIX Futures 16.53

Options Paper:

Options paper remained overall light in Wednesday's trading session. KLA-Tencor (NASDAQ:KLAC), Conoco Phillips (NYSE:COP), and Kohlberg Kravis Roberts (NYSE:KKR) all saw very heavy call volume, and some people messaged me asking what this action was signaling. Always trying to educate my readers, this is part of a dividend capture technique used by MMs and huge investors to steal dividends. (You can read more about this technique here.) S&P ETF (NYSEARCA:SPY), S&P Index ^SPX, and the VIX were the top 3 in terms of option contracts today. The biggest name reporting earnings tonight is networking maker Cisco (NASDAQ:CSCO). Today, CSCO is well over 2x average daily volume, headed for 3x, and bears and bulls are beating each other to a pulp trying to get in front of these earnings. CSCO typically only trades 110K contracts, but today saw more than 230K with 2 hours left to trade. Interestingly, front month volatility continued to rise, while both back month volatility stayed mostly flat. This signals front month options were seeing buying pressure, whereas back months were being sold. Considering calls were sold on the bid 57% of the time and puts were bought on the ask 51% of the time, this would lead me to potential stock weakness after earnings. However, if you take into account that net premium where calls were net sold to the tune of 500K and puts were net sold 100K, it's hard to pick a specific direction. I was asked multiple times on Twitter how I was playing CSCO going into earnings, and although I was considering a 1:2 ratio spread, I think I'm just going to sit this one out after winners this week in Michael Kors (NYSE:KORS), Buffalo Wild Wings (BWLD), and Mosaic (NYSE:MOS).

Statistics and Screenshot Provided By LiveVol

Alpha Natural Resources (ANR) reports after the bell today. This sector has been all over the place of late. ANR has seen a ton of bearish paper as the coal stocks have seen weakness of late, but today, this was not the case for ANR. February volatility screamed to the upside as February 9 strike call buyers were hitting the tape all day. Although not super heavy in terms of volume, calls were bought on the ask 71% of the time, and puts were sold on the bid 54% of the time, signaling a potential bullish move post-earnings. One must put this in context as well, as a short could use this strategy to help limit losses by buying calls and selling downside puts, so please keep that in mind. Overall options activity was slightly higher than average, with calls just edging out puts 1.2 to 1 on the trading session.

Statistics and Screenshot Provided By LiveVol

Dendreon Corp (NASDAQ:DNDN) is no stranger to the sonar report, but today some heavy bearish activity needed to be noted. This is a name I'm actually looking to go long in the near future, but today's options activity was clearly bearish. More than 39K contracts traded hands, with calls outnumbering puts 1.3 to 1, which on the surface looks bullish. However, when you dig into the activity, calls were sold on the bid 70% of the time, and puts were bought 76% of the time. This activity accounted for calls to be net sold to the tune of 1.3M in premium, and puts actually bought to the tune of 860K. Options activity was more than 4x average daily volume in DNDN, so keep this on your radar, as earnings come out before the bell on February 25th.

Statistics and Screenshot Provided By LiveVol

Popular ETFs and equity names with bullish/bearish paper:

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

GT Advanced Technologies (GTAT) 74% - Solar stocks have seen call buying on REIT talk

Target Corp (NYSE:TGT) 72% - Jan 2014 67.5 call buyers

Marvell (NASDAQ:MRVL) 97% > 5% OTM - Highlighted in my speculative play Friday (here)

Newcastle Investment (NCT) 99% - August 12.5 calls bought

Express Scripts (NASDAQ:ESRX) 2.1K ISE calls

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

Big Lots (NYSE:BIG) 75% - Discount stores have seen pressure

Staples (NASDAQ:SPLS) 70% - Put buyers continue to build

Aetna (NYSE:AET) 69% - Interesting action, considering blowout from Progressive (NYSE:PGR)

VistaPrint (VPRT) 1K ISE 32.5-30 put spread bought for .56

Disclosure: I am long AGNC, AVGO, BA, CBB, CONE, F, INTC, KERX, KOS, MOS, MTGE, NRG, PCLN (straddle), TUMI, VHC, VOD, and I am short DDD, EDU, PCLN (strangle), SPY.

Trades Today: Closed BWLD short, Closed CMG short, Closed PG long, Closed KORS long, Closed CSTR long, Rolled short PCLN strangle, Bought EOG call diagonal.

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.