VIX/Volatility Options Sonar - Friday Recap

Includes: BAC, DMND, MTG, XLI, XME
by: Erick McKitterick

VIX – Market Sentiment:

Friday the CBOE Volatility Index (.VIX) held a pretty tight trading range with all things considered. The current levels of the VIX or the "Fear Indicator" are suggesting a 23-27 point move in the S&P 500 index (.SPX). However, with the outsized 50+ point move Tuesday something has to give. Although I identified a very large 110K 35/55 call spread, this thesis thus far has not worked very well as the 30+ million dollar trade is now worth <10 million. However, it is important to note someone bought a variation of this call spread again Friday 25,000 times for .18 at around 11:40. This time it was the DEC 35 and FEB 55 call spread. This is another 4.5 million dollar bet the VIX will spike prior to DEC settlement.

Options Paper:

Delta Airlines. (NYSE:DAL) saw a flurry of activity in the options market. DAL has seen over 56,000 contracts with an average daily volume of just north of 14K.

This 4x normal volume appears to be focused on the call side with bigger players appearing to roll out positions. Watch this stock in the upcoming weeks as this could move on any type of news.

Volatility Explosion:

MGIC Investment (NYSE:MTG) continued to see IV climb, making these already pricey options to become yet more expensive. MTG has been on an absolute tear with both calls and puts flying all over the place. Some very interesting plays through calendars, diagonals, and backspreads could be potentially used here to capture some premium.

Volatility Implosion:

Even though Diamond Foods (NASDAQ:DMND) has had some crazy volatility in the past, the 30 day IV index Friday dropped another 33 points. This volatility has been very warranted considering this stock has been more than cut in half in the last 30 days. Selling some way out of the money calls and puts could be a great income generator here as this stock settles down in the next few weeks.

Other Options Notes:

Industrial SPDR (NYSEARCA:XLI) saw a large block of 46K of the 29 puts went off just after noon. This appears to have been a speculative bet XLI could test lower prices.

S&P Metals (NYSEARCA:XME) 25K of the 43 puts traded suggesting a possible heavy drop in the next 15 days.

Bank of America (NYSE:BAC) earlier this week massive volume came into the DEC and JAN 6 calls in BAC and many of these calls have doubled in price. Watch this as the traders reposition moving forward.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in XME, XLI, BAC over the next 72 hours.

Additional disclosure: 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.

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