VIX - Options Volatility And Market Sonar: Tuesday Recap

by: Erick McKitterick

VIX - Market Sentiment

Welcome back from the extended trading weekend. Friday, the final trading day before the three-day weekend, saw S&P futures moving -- you guessed it -- higher. The S&P has closed between 1517 and 1521 the last six trading sessions. Going back through history, the market has not closed six sessions in this tight of a range in more than four years. Today, the market headlines were topped by a proposed Office Depot (NYSE:ODP) merger with OfficeMax (NYSE:OMX). The merger would most likely be done with a straight stock as both retailers have struggled over the years due to increasing competition.

On the international side of things, German investor sentiment improved yet again, increasing to 48.2 from 31.5 in January. This crushed the consensus estimate of 35, but was held back as the current situation index unexpectedly fell from 7.1 to 5.2. I am a believer the market doesn't give investors six-plus days to sell the top, so I believe the next leg will more than likely be higher. That said, for those who follow me on Twitter I did raise a lot of cash last Friday, and I am increasing hedges with the market up so high and volatility so low.

The spot CBOE Volatility Index (VIX) and futures diverged again on Tuesday, as VIX cash was up but futures were -- you guessed it -- down. Though later in the day spot VIX did finally retreat lower, as SPX put bid pressure was again taken away. Volatility ETF (NYSEARCA:VXX), 2x ETF (NASDAQ:TVIX), and alternative 2x ETF (NYSEARCA:UVXY) were trading down along with the futures. The VIX was trading under average daily volume with no huge trades. Some larger VIX call purchases did go off today -- specifically, March 18 and 22 strike calls were both somewhat active today. Overall call premium was bought to the tune of 465K and put volume was 95K -- that's mostly neutral. VXX options activity was over average with large put buyers again stepping up, believing this market will continue to melt higher.

Click to enlarge images.

Source: Statistics and screenshot provided by LiveVol.

VIX futures are below:


  • March VIX futures 14.53
  • April VIX futures 15.63
  • May VIX Futures 16.40


  • March VIX futures 13.98
  • April VIX futures 15.08
  • May VIX Futures 15.85 (I cannot believe May futures are now below 16)

Options Paper

Tuesday's options paper remained lethargic as traders come back from the extended weekend. S&P ETF (NYSEARCA:SPY), S&P Index ^SPX, ^VIX, Apple (NASDAQ:AAPL), and Russell ETF (NYSEARCA:IWM) led the way in terms of options activity with none of them over average. One interesting option trade that did catch my eye was what looked to be a short cover buying of 111K of the December 51 strike Emerging Market ETF (NYSEARCA:EEM).

This trader appears to have sold 111K of the December 51 calls on Jan. 28 for .61 collecting 6.787M in premium. Now, this trader appears to be taking this trade off covering the short for 5.237M profiting more than 1.5M in profit in just three short weeks. This, of course, would need to be confirmed by open interest tomorrow being reduced by 111K contracts, which I fully expect. Options activity was just average today with both call and put premium being bought overall, and calls outnumbering puts 1.6 to 1.

Source: Statistics and screenshot provided by LiveVol.

Last week I wrote a feature article on Herbalife (NYSE:HLF), which you can check out here. News of hedge fund manager Daniel Loeb cutting his stake just days after Carl Icahn announced holding a 13% stake late last week had HLF under pressure early Tuesday. HLF Q4 earnings are due out after the bell today and will more than likely be a very violent move, as options are pricing more than a 10% move. Last Friday, I received some messages regarding why the 21K May 22.5 strike put purchase was not on the sonar report (here). The reason I left this off was to see if it increased or decreased open interest. After digging over the weekend, it turns out this was one trader booking massive profits in the name.

On Dec. 21, a trader came in selling the May 22.5 calls 11K plus time collecting 5.4M worth of premium. HLF then rallied, but the trader came back to the well selling 10K of the puts again on Jan. 3 collecting another 1.8M in premium. In total, the trader collected more than 7.9M in premium selling the high volatility puts. The trader booked massive profits on Friday as open interest fell to 11K, showing a closing position as he then paid .90 to buy 21K+ contracts for 1.9M. Overall, this trader booked over 5.2M in profits in just over 45 trading days -- again, not a bad trading day. I was messaged several times as to what I was going to do going into earnings and the answer is simple. I'm on the sidelines at this time. Options activity was almost 2x average daily volume with put premium bought 1.1M and call premium bought 630K. Calls outnumbered puts almost 2-to-1 on the trading day.

Source: Statistics and screenshot provided by LiveVol.

Popular ETFs and equity names with bullish/bearish paper:

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

Hospira, Inc. (NYSE:HSP) 88% -- 9.2K OTM calls bought

CBS Corporation (NYSE:CBS) 72% -- Huge call roll as trader booked big profits and leveraged up to 50 strike calls

Peregrine (PPHM) 71% -- Almost 25K OTM calls bought on offer

Advanced Micro (NASDAQ:AMD) 66% -- More calls continue to be bought

Pioneer Natural (NYSE:PXD) 64% -- 2.2K OTM calls bought

Texas Roadhouse (NASDAQ:TXRH) -- 1.7K ISE calls

Monster World Wide (NYSE:MWW) 1.7K ISE calls

Micron (NASDAQ:MU) -- 1.25K ISE calls

BRE Properties (NYSE:BRE) -- 1.2K ISE calls

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

Forest Oil (NYSE:FST) 96% -- 6.1K OTM puts bought

Avid Technology (NASDAQ:AVID) 81% -- 2.5K OTM puts bought

Kinross Gold (NYSE:KGC) 77% -- 4.1K OTM puts bought

Alliance Resource (NASDAQ:ARLP) 75%

Dow Chemical (DOW) 64% -- 4.1K OTM puts bought

FirstEnergy (NYSE:FE) 6.5K ISE puts (hard to tell if bought or sold) -- 773K put premium bought

Zimmer Holdings (ZMH) 1.4K ISE puts

PVR Partners (NYSE:PVR) 1K ISE puts

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: Added to SPY short, Sold DDD diagonal puts, Sold WMB calendar calls against long

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.