VIX - Options Volatility And Market Sonar: Friday Recap

by: Erick McKitterick

VIX - Market Sentiment:

Friday, the final trading day before the extended three-day weekend, saw S&P futures moving 5 handles top to bottom. Opening near the highs of 1519.40 then moving lower and touching 1514.40 before rallying back towards the open down just fractionally heading into the open. Topping the headlines the SEC announced probes into the pre-buyout trade in Heinz (HNZ) options just 1 day before the 28B buyout offer. As I mentioned yesterday (here) unusual options activity was flashing on my screen after 2,593 contracts went off on a stock averaging just 13 contracts a day over the previous 20. I of course did not act on this information and now am crying thinking about the massive profits which could have been. In other news Herbalife (NYSE:HLF) was screaming in the pre-market after Carl Icahn disclosed a 14M share or 12.9% stake in the company. I wrote an article (here) on Seeking Alpha discussing methods where you could profit from the volatility in the name. CBS (NYSE:CBS) shares were down in early trading after Q4 earnings missed expectations and soft guidance weighed on the stock. Procter & Gamble (NYSE:PG) was a stock I exited this week after a massive run up warned profits may miss following Venezuelan currency devaluation. Finally the pre-market movers Tiffany (NYSE:TIF) and Costco (NASDAQ:COST) were both in motion after TIF announced a lawsuit against COST. The lawsuit claimed COST was selling "counterfeit diamond engagement rings".

In the sonar report (here) I pointed out how I fully expected the spot CBOE Volatility Index (VIX) to touch new lows ahead of the 3 day extended weekend. The VIX broke this level of 12.29 moving all the way down to 12.24 before SPX put buyers again returned. The negative futures contango curve continues to crush volatility ETF (NYSEARCA:VXX), 2x ETF (NASDAQ:TVIX), and alternative 2x ETF (NYSEARCA:UVXY) down more than 1% again today trading with futures. Today the big moves were pretty much liquidation in the March call spreads until mid day. The March 17, 18, 22, and 40 strike calls were very active in today's session with overall call selling continuing to put pressure on the futures. Although the VIX did perk up during a midday selloff the market again came roaring back to close above 1518 yet again.

Statistics and Screenshot Provided By LiveVol

VIX futures are below.


· March VIX futures 14.58

· April VIX futures 15.70

· May VIX futures 16.45


· March VIX futures 14.53

· April VIX futures 15.63

· May VIX futures 16.40

Options Paper:

Options expiration Friday is always interesting as it relates to option paper. Today with 30M to go we had already eclipsed more than 19M option contracts. Today S&P ETF (NYSEARCA:SPY), S&P Index ^SPX, and Microsoft (NASDAQ:MSFT) lead the way in options with MSFT being a dividend capture trading more than 5x call volume. Russell (NYSEARCA:IWM), Apple (NASDAQ:AAPL), and Gold ETF (NYSEARCA:GLD) were all active as well today with GLD really catching some volume as it broke key technical levels. BlackBerry (BBRY), and Silver ETF (NYSEARCA:SLV) also both saw heavy option activity with both looking fairly bearish overall. I used expiration Friday to raise cash today closing and trimming longs heading into the long weekend. My article earlier this week (here) spelled out some cracks for the overall market where I see some weakness. My theory here is simple raising cash here and taking some profits if the market moves 20 handles higher next week I can look more to short opportunities and if we pull back I can re-load so it is a win-win here.

Statistics and Screenshot Provided By LiveVol

Dendreon Corp. (NASDAQ:DNDN) is a medical company I have wanted to get long for quite some time. This week huge call selling combined with put buying has investors spooked and this theme continued again today. Today on almost 4x average daily volume another large collar in the August 7 - 5 strikes. Today the August 7 strike calls were sold another 10K times and the proceeds were used to buy the August 5 strike puts for a .12 credit. This is the third time I saw this happen this week alone as 10K blocks of this exact same trade continue to be executed. I fully expect DNDN August 5 puts and 7 strike calls to be north of 30K open interest when the market re-open on Tuesday. I did take advantage of the volatility spike to sell the February 6 strike puts yesterday which allowed me to collect a quick .06 on the day. This of course assumes DNDN will be above 6.00 as of the close today. Overall this week calls saw net sellers collecting almost 900K in call premium sold. When you combine this with the almost 2M in put premium which was bought this would lead me to believe DNDN will experience some pressure when it reports on 2-25. Calls outnumbered puts more than 1.2 to 1 but again calls were sold so this is bearish activity. I will keep you posted to if I make a move on this pre-earnings via Twitter and Seeking Alpha.

Statistics and Screenshot Provided By LiveVol

Popular ETFs and equity names with bullish / bearish paper:

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

Forest Oil (NYSE:FST) 85% - 3K OTM calls bought

Saks (NYSE:SKS) 73% - 5K August 12 strike calls bought

Fortress Investment Group (NYSE:FIG) 73% - 2.5 OTM calls bought

Southwestern (NYSE:SWN) 65% - of 3.5K OTM calls bought

Gold Trust ETF (NYSEARCA:IAU) 61% as July 17 calls bought in good size

Symantec (NASDAQ:SYMC) 18K calls traded with almost 12K bought on the ask and 10.8K OTM

Axiall Corp. (NYSE:AXLL) 4.7K ISE calls bought

Aegerion (AEGR) 3.2K ISE calls bought

Textron (NYSE:TXT) 2K ISE calls bought

JetBlue (NASDAQ:JBLU) 2K ISE calls bought

Cemex (NYSE:CX) 1.7K ISE calls bought

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

Cheniere Energy (NYSEMKT:LNG) 89% - 6K OTM puts bought

Swift Transportation (SWFT) 77%

Lamar Advertising (NASDAQ:LAMR) 77% - 4K OTM puts bought

Hecla Mining (NYSE:HL) 74% - 3.5K OTM puts bought

Kimberly-Clark (NYSE:KMB) 3.6K ISE puts bought

Forest Oil 2.5K ISE puts bought

Leap Wireless (LEAP) 1.4K ISE puts bought

Deutsche Bank (NYSE:DB) 1.3K ISE puts bought

Remember equity insurance always looks expensive until you need it!

Disclosure: I am long AGNC, AVGO, BA, CBB, CONE, MOS, MTGE, NRG, PCLN (straddle), TUMI, VHC, and I am short DDD, EDU, LULU, PCLN (Strangle), SPY.

Trades Today: KERX long called away, Stopped out of KOS long, short DNDN puts expired, INTC calls expired, Closed AVGO diagonal, Closed F long, Added to SPY short (hedge).

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.