VIX - Options Volatility Sonar: Monday Recap

by: Erick McKitterick

VIX - Market Sentiment:

Welcome to week 2 of trading in the 2012 trading season. Today the futures were what we like to say "flat" as there was next to no movement, only trading in a 8 handle range. As the S&P ETF (NYSEARCA:SPY) opened at 128.00 just .29 higher than Friday's close. Right out of the gate a few things caught my eye.

The spot CBOE Volatility Index (VIX) popped at the open but then faded into the noon hour. Initially the SPX had some decent put activity but as the VIX faded so did the activity. Throughout the trading session the market continued to meander upward, closing the day up .2% or 2.89 points.

On a flat to up day the interesting action in my opinion is the Nasdaq components. All components which were strong traded very weak. Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) and even tech giant Apple (NASDAQ:AAPL) all traded down in a relative flat tape. Therefore I am hedging my longs by buying Nasdaq ETF (NASDAQ:QQQ) calendars. Buying next week's 57 put and sold the weekly 56 put 2x times.

Options Paper:

Comcast (NASDAQ:CMCSA) is a name which has been ripping higher since 2012 began, and today large blocks of calls traded. CMCSA traded more than 16,500 calls prior to noon and the ratios continued to climb with calls outpacing puts 4:1. This initially appeared to be bullish flow but the time of sales may indicate the calls were sold. I initially bought the CMCSA calls and flipped them for a quick trade.

Safeway (NYSE:SWY) saw some interesting put activity as the Feb. 20 puts were gobbled up in the masses. For a name which only trades 954 puts a day to see a large block of 4K puts trade all bought at the ask is very troubling. This is probably a hedge as SWY could retreat in the next 3-5 weeks as it has had a very significant run over the last few weeks. I jumped into this name, buying the SWY 21 puts. Puts outnumbered calls 15:1.

Popular ETF's and equity names with bullish/bearish paper in terms of call/put ratios:

Calls outnumbering Puts:

KeyCorp (NYSE:KEY) 243:1 (7.5-8 call diagonal 6K times)

ON Semiconductor (ONNN) 109:1

BioSante (BPAX) 278:1

Ace Ltd. (NYSE:ACE) 32:1 (Appears to be large call selling occurred at the close 18K worth)

Puts outnumbering Calls:

Jones Apparel (NYSE:JNY) 18:1

Omnicare (NYSE:OCR) 57:1

Qihoo360 (NYSE:QIHU) 21:1

Time Warner (TWC) 7:1

Volatility Explosion:

Perfect World (NASDAQ:PWRD) had anything but a perfect day today, trading down more than 20%. As typical with such a move, the options implied volatility exploded to the upside, climbing to 91% from 60%. PWRD only normally has 750 options trade a day and more than 7K puts had traded before noon, outpacing calls 4:1. More than 63% of these puts were bought at the ask showing a big scramble for downside protection. With IV this high if someone wanted to pile into this short it should only be done through spreads as any IV collapse in the future would destroy the value of the puts.

Rare Element (NYSEMKT:REE) saw its IV scream up as the share prices have more than doubled since 12/29. The call and put activity was more than 6x normal as IV continues to climb.

Volatility Implosion:

Inhibitex (NASDAQ:INHX) saw IV absolutely implode, down more than 90%, after the apparent buyout offer from Bristol Myers Squibb (NYSE:BMY). The options were extremely heavy last Friday, buying the February 10-15 call spread 2,000 times and a large 2.4K 15-25 diagonal. The 10-15 call spread netted the trader a cool 800K overnight while the 15-25 diagonal will net the trader close to $2.4 million if the deal goes through. Yet another example of why I try to follow the options market. I saw this one pop up on my screen but did not act on the trade. Today the biggest trades were someone selling the 22.5-17.5 February put spread for a .55 credit. I will continue to bypass this name but one could collect a nice fat credit between now and February expiration.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.


I am long AGNC, NLY, SDS, APC.


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.