VIX - Options Volatility Sonar: Tuesday Recap

by: Erick McKitterick

VIX - Market Sentiment:

Just one trading day after fear returned to the market it appears investors didn't care about the Europe downgrade as futures soared in early trading. The S&P futures traded over the 1300 level for the first time since August, but then action was tempered slightly lower when Citigroup (NYSE:C) reported earnings that missed estimates. It does appear some amount of volatility may be creeping back into the market as the futures moved more than 20 handles in pre-market the biggest move in 2012.

The CBOE Volatility Index (VIX) signaled some early signs of warnings as the VIX was up even with the S&P also up and over 1300. However, into the noon hour of trading the S&P began a slow leak of gains back below the 1300 level lead lower by financials. Again the popular volatility ETF (NYSEARCA:VXX) once again was down today as the VIX futures were down but maintained some strength off of February futures staying flat.

This leak continued towards the close as S&P ETF (NYSEARCA:SPY) continued to fade towards the 129 level. This is important as we again are below resistance on a day where we started with an extremely positive tape. The NASDAQ 100 ETF (NASDAQ:QQQ) also saw a move down, but the interesting part in the options market were the majority more than 57% of calls appeared to be bought at the ask on strong call volume. Positive net premium and net delta numbers also would confirm this being positive for the market. Other earnings play names with positive net premium and net delta were tech giants Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL). These would be bullish indicators moving into earnings but be weary these numbers typically run into earnings.

Options Paper:

Natural Gas ETF (NYSEARCA:UNG) has been taken to the woodshed over the last year and today was no different. Today UNG traded more than 5% lower than the lower end of the Bollinger band. This is not normal especially for commodities such as natural gas. Today, however it appears some bulls are stepping in with some longer Jan 2013 calls being bought. Of the 75K calls which traded at the noon hour 48% were bought on the ask and more than 30K of that was out of the money. The big trade of the day on UNG was a seller of the April 5 / 6 strangle. The trader sold 5,500 of the April 6 calls and at the same time sold 5,500 of the April 5 puts. This trader collected .60 on the trade and effectively collected 330K in premium. The trade has max profit if UNG is anywhere in between 5-6 and does not take losses unless UNG is below 4.40 or above 6.60. UNG option volume was more than 4x normal on the day.

Quicksilver (NYSE:KWK) saw a rush for the February 5 puts when more than 5,000 contracts crossed the wire. KWK had traded more than 5,200 contracts prior to new and is more than 10x normal. Of these puts more than 80% of them were bought on the ask. I followed this trade and bought some in the money puts hoping to play off of this trader's thesis. Puts outnumbered calls 72 to one of the trading session.

Pitney Bowes (NYSE:PBI) saw a large rush of July 17 put buyers today. Today more than 7.5K puts traded which is more than 6x normal volume. This trader believes PBI who just ran into resistance here is due for a pullback and is expecting the downtrend to continue. As with KWK I followed this trader and bought some of the July 17 puts looking for a pullback. Puts outnumbered calls more than 10:1.

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

Calls outnumbering Puts:

Sirius XM (NASDAQ:SIRI) 15:1

Agrium Inc (AGU) 16:1

AnnTaylor (NYSE:ANN) 16:1

Teekay Corp (NYSE:TK) 19:1

Puts outnumbering Calls:

Pitney Bowes 11:1

Saks (NYSE:SKS) 37:1

Eagle Bulk (NASDAQ:EGLE) 148:1

Hasbro Inc (NASDAQ:HAS) 9:1

Best Buy (NYSE:BBY) 4:1

Charles Schwab (NYSE:SCHW) 5:1

Volatility Explosion:

After the terrible accident off the coast of Italy Carnival (NYSE:CCL) and Royal Caribbean (NYSE:RCL) saw IV explode in early trading today. A rush to safety as puts were bought and calls appear to have been sold across the board in CCL. CCL saw IV explode to the upside with a jump more than 38% higher than yesterday. I have in orders for a RCL risk reversal which has not been filled yet. I played RCL as although I believe the industry is under pressure RCL has no liabilities to this in comparison to CCL. CCL volume was more than 19x normal volume and puts outnumbered calls 3:1 on the trading day.

Research in Motion (RIMM) today saw a massive spike in implied volatility when the stock jumped 10% on Samsung takeover rumors. These rumors have caused front month IV to skyrocket with call buying pressure caused these prices to move north in a very quick fashion. These options screaming in volatility could be from shorts protecting themselves from a potential buyout of RIMM. Anyone who reads my articles knows I am no fan of RIMM as I believe it is a broken company. A great trade here could be selling these inflated calls to take in premium between now and Friday if you believe as I do there is no deal to be completed prior to Friday.

Volatility Implosion:

Both Wells Fargo (NYSE:WFC) and reported today with drastically different results. Both WFC and C front month options did decrease as one would expect after reporting the Feb options are a different story. The largest WFC call trades on the day continue to be sold as shareholders take secure and lock in profits. With all this call selling IV did drop around 11% on a relative basis. However, if you flip the card to Citigroup it is a much different story. The calls and puts were sold and bought across the board almost 1:1 but with the calls and puts being bought just as much as sold the buying pressure kept IV higher in back months than one would expect. Depending on your thesis regarding these banks if you believe these banks could be range bound selling a strangle or straddle could be very profitable if someone wishes to do so.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it!

Disclosure: I am long AGNC, SDS, APC, ZSL and TBT. I am short SIAL, JNY, RAX, LNKD, AMZN, TMO, MU, AA, EWG, KWK, PBI, BAC and DHI.

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.