VIX - Options Volatility Sonar: Monday Recap

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Includes: DMAN, EEM, FCN, IBM, NSC, P, SDS, SIRI, XLP
by: Erick McKitterick

VIX - Market Sentiment:

After a yawn of pre-market Monday, US markets woke up to slight gains in the S&P index. The majority of this move was attributed to the "melt-up" action in Europe. However, this move was short lived as predicted by

the CBOE Volatility Index (VIX) when it opened just north of the important 25 level. The S&P index (NYSEARCA:SPY) continued to drop in early trading and heading into the close, showing once again the VIX was indicating weakness. With many professional traders out for the rest of the year this very well could be the norm through the new year.

Last Friday I stated a belief that purchasing the SDS 20 / 23 call spread could be a potential good hedge for a potential market selloff. The trade can still bought for ~1.00 and I today purchased this hedge myself to the tune of 50 contracts. I still believe this is a good low-risk play to hedge existing longs against any volatility increase or market selloff.

Options Paper:

FTI Consulting (NYSE:FCN) saw a very large put roll from January to March. This gives the trader 2 extra months of protection down to around the 30.00 level as the March 35/30 put spread 1:2 was purchased just after 10:00. Options volume was more than 27x normal in this name which only sees an average of just over 600 contracts a day. Because of this roll of puts it makes the put call ratio much more skewed to the put side currently trading more than 525:1.

Norfolk Southern (NYSE:NSC) saw more than 23 times normal put volume today on what was a quiet trading day; this appears to be a 65/55 January put spread betting NSC will NOT see a more than 7% decline prior to expiration. This spread appears to have been sold for .50 and could expand to 10.00 in the event of an extreme selloff. Watch this name in the upcoming weeks to see if this trader’s ~700,000 bet will pay off or collect the premium betting NSC will stay above 65.

Volatility Explosion:

SiriusXM Radio (NASDAQ:SIRI) saw a large move in options IV30 today when the options pricing increased almost 15%. Options volume was not explosive in this name, but with February coming on the books the most active strike was the February 2 calls. Not much paper in this name -- a little over 1K -- but still interesting as the call activity in this name continues to climb, suggesting a possible bullish trend.

Volatility Implosion:

Online music service provider Pandora (NYSE:P) saw a large 20% drop in implied volatility today. Option premium came in as the January 9 calls were very active today. Not super clear as to whether these were bought or sold, but the majority of them appear to have been sold, suggesting someone believing P will retest the lower end of the range soon. Because the spreads on Pandora are so large, liquidity is hard to come by in its options. Traders should use very tight buys and only pay up for ask if ready to commit for a serious move.

Other Options Action:

Both the Consumer Staples (NYSEARCA:XLP) and Emerging Markets Index (NYSEARCA:EEM) ETFs saw greater than normal puts today. EEM traded almost 4.5:1 puts to calls, once again suggesting the EEM market may be poised for a hit. This bearish trend is dwarfed by the XLP trading more than 11:1 put to call ratio. Many of these Sector ETFs have been hit recently, and it looks as if some traders are looking for yet even more downside.

DemandTec (NASDAQ:DMAN) saw an astounding 1850:1 put to call ratio in the options market today. Although not completely clear, the initial reading of these puts in the January 12.5 strike appear to be purchased. Although not surpassing open interest in the strike, keep an eye to see if the OI changes tomorrow to verify if they were purchased. If purchased, it could signal a trader possibly doubting the IBM deal announced earlier this month.

As always, happy trading, and stay hedged. Equity insurance always looks expensive until you need it!

Disclosure: I am long AGNC, NLY, PAAS, TRGT, FNSR, IR. I am short RIMM, DHI, INTC, VXX.

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.