VIX - Options Volatility Sonar: Friday Recap

by: Erick McKitterick

VIX - Market Sentiment

After slow trading Thursday, S&P futures were extremely flat coming into the unemployment number released today. The S&P futures jumped more than 13 points after the unemployment numbers beat forecasts. The unemployment rate dipped to 8.3% which was .2% better than forecast. The employment change number of 243K blew away the 150K forecast and it appears the U.S. economy appears to be breaking out. Interesting as the S&P ETF (NYSEARCA:SPY) traded above the 134 level which is a key resistance. It will be very interesting to see where we close to see if this uptrend is confirmed. As I noted in my previous articles the S&P cash had a short term top of 1333.47 and with these numbers have moved through so a hold above this level could be key here.

Again the spot CBOE Volatility Index (VIX) was absolutely destroyed today, down big at the open. Long holders of volatility ETFs (NYSEARCA:VXX), 2x ETF (NASDAQ:TVIX), Proshares (NYSEARCA:VIXY) and Mid-Term VIX ETF (NYSEARCA:VXZ) were slapped at the open hard. It is important to note again people who are long these shares must understand you do NOT follow the spot VIX. You follow VIX futures which are priced as follows as the front month futures were taken to the woodshed.


February VIX futures 19.53

March VIX futures 21.78

April VIX futures 23.40


February VIX futures 18.30

March VIX futures 20.90

April VIX futures 22.60

The contango again continues in VIX futures and pain will continue to be felt by these shareholders unless we get a very sharp correction. The divergence between the moving averages is really starting to move as we are again moving hard to the upside. We saw the golden cross in the SPX and SPY earlier this week and we have been nothing but gangbusters ever since. I still believe diagonal hedges, collars or ultrashort (NYSEARCA:SDS) calls are best here for those looking for downside protection or just outright bearish bets.

Options Paper

The emerging market ETF (NYSEARCA:EEM) saw a massive 100K/200K/100K March 43-41-39 put fly which went off today. This large bet of ~3M would expand to 20 million if EEM pinned to 41 at March expiration. EEM option paper today is extremely bearish and follows some of the option paper we saw earlier this week. EEM normally only trades 100K calls and 137K puts and this one trade has taken the volume off the charts. Puts outnumbered calls 6:1 in this name but remember effectively 400K of these option contracts offset as half were bought and the other half sold on the fly trade.

Sunoco (NYSE:SUN) has been trying to break resistance for quite some time and some bulls are stepping in as the May 40 calls went off more than 7.6K times. These calls went off and appear to be players looking for the break above the 38.50 range. Again energy sector stocks have been punished of late and SUN is no different but has had a very nice January run. Options in this name continue to pick up but the price action cannot get above the 38.50 level. A close above this level could be very bullish for this name.

China ETF (NYSEARCA:FXI) saw a buyer of the March 44/45 call spread go off for .14 2,800 times today. This is a cheap shot bet the FXI will continue to move north and would turn a 39K bet into 280K in just over a month if FXI was above 45 at March expiration. Although this is not a large bet in the context of such a large ETF it is representative of other bullish paper which has come rolling into this fund. I caution traders of this name net premium and net deltas have been very bearish on this name as puts continue to accumulated but in much smaller blocks.

Jabil (NYSE:JBL) who have had calls outnumbering puts on the sonar in weeks past today saw a large buyer of the March 25 calls. Today calls outnumbered puts more than 32:1 going into the noon hour and more than 92% were bought on the ask. Considering IV continues to come in on this name it is a great way to bet as if this name moves up these calls could explode to the upside. I did a small order buying the March 25s and selling the Feb 25s against them so my time decay doesn't eat away my position on a pullback.

Pioneer Natural Resources (NYSE:PXD) saw calls and puts fly off the shelves today on almost 5x normal daily volume. However, the interesting trades today for me was the February 105/115 call spread bought and the February 95 and March 95 puts were also clearly bought. The majority of options bought at the ask was the 5K of the February 95 puts which went off around 10:32 today. This appears to be the perfect example of bulls and bears battling it out and the action is fierce.

Berkshire Hathaway (NYSE:BRK.B) saw one very large purchase of 5,000 June 90 calls trade today. Right now BRK.B is stalled below resistance of 80.00. This large block purchase believes Mr. Buffet's BRK.B could run back up to prices which have not been seen in quite some time. Calls outnumber puts more than 2.5:1 and are above average volume by almost 2x.

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

Calls outnumbering puts:

International Rectifier (NYSE:IRF) 355:1 (Large buyer of March 25 calls)

Boston Scientific (NYSE:BSX) 38:1

DryShips (NASDAQ:DRYS) 33:1

Ariba (NASDAQ:ARBA) 29:1

Dunkin Brands (NASDAQ:DNKN) 26:1

Frontier Communications (NYSE:FTR) 24:1

Masco (NYSE:MAS) 63:1

ViroPharma (VPHM) 49:1

Oshkosh Truck (NYSE:OSK) 22:1

Time Warner (TWC) 20:1

General Dynamics (NYSE:GD) 19:1

EMC Corp (EMC) 17:1

Dangdang (NYSE:DANG) 17:1

Puts outnumbering calls:

Jefferies (JEF) 11:1 (Been a common theme of late)

Ryder System (NYSE:R) 5:1

Diamond Foods (NASDAQ:DMND) 4:1

AnnTaylor (NYSE:ANN) 13:1

Bankrate (NYSE:RATE) 14:1

BE Aerospace (BEAV) 15:1

Perrigo (NASDAQ:PRGO) 22:1

First Cash (NASDAQ:FCFS) 26:1

Acorda (NASDAQ:ACOR) 45:1

TE Connectivity (NYSE:TEL) 182:1

Companhia Vale (NYSE:RIO) 9:1

Volatility Explosion

Cheniere (NYSEMKT:LNG), Zynga (NASDAQ:ZNGA) and Gilead (NASDAQ:GILD) are no strangers to the sonar report. Today is no different as these names are running and have been running for quite some time.

Online gamer ZNGA hit a new volatility 52-week high of 120.00 as options in this name have exploded. Net premium and net deltas show puts being sold and calls being bought but the open interest on this name is exploding to the upside on both calls and puts now both sides are more than 4x average open interest. Considering not too long ago we saw an IV rating of just 60% the straddle buyers have made some serious bank of late.

As for LNG the current IV (98) is no match for the 52-week high of 175.00. This name has been and continues to make violent moves both to the upside and downside. Today the March 12 calls were sucked up as buyers across the board and sellers of the March 10 puts came screaming into the market.

Finally GILD stock price spiked more than 9% today after reporting but the interesting play here is IV actually increased after the release. This is not typical but the positive HIV drug news was enough to lift the stock and call and put buyers are stepping in all over the place. Overall calls outnumbered puts almost 3:1 on the day but almost all large trades occurred either at the ask or the bid which implies traders are impatient to put on trades as the spreads are somewhat wide on this name.

Volatility Implosion

Power One (NASDAQ:PWER) today saw an absolute implosion in IV today after reporting Q4 numbers ahead of the street. However, it appears the forward looking guidance was not so impressive but today bulls didn't care. Although a somewhat light name in terms of options there were several call rolls today buying the March 5 calls. The calls appear to have been bought 60% at the ask and outnumbered puts more than 25:1 going into the noon hour. Although I have no specific play on this name or any money long or short I do like the price action in this computer and technology name as they have been on fire.

Speculative Play Friday

The last three Friday plays have done well. Frontier (FTR), Kinross (NYSE:KGC), and Walter Energy (NYSE:WLT) saw some very nice runs shortly after my articles. Congrats to anyone who participated in these moves to the upside. If you read my articles on a regular basis you know I'm very skeptical regarding a potential correction. I am fearful to play much from the long side as every indicator is pointing to an overbought condition but you can't fight the tape.

My trade today is Goodyear Tire (NYSE:GT) as the options paper in this name continues to build. Today the bullish paper came in the March 14 calls. This appears to be a bullish bet GT will continue a run higher after it reports earnings on February 14th. This could be a great Valentine's Day for longs if they continue to blow away earnings. The last three quarters they have beat numbers and beat them hard. This stock was an absolute steal below the 10.00 mark in late 2011 and it appears bulls believe a run back to the April highs of last year could be in store as the economy improves. I like taking advantage of volatility here if someone likes this name and selling front month calls against back dated calls to reduce costs and get the math working in your favor. For those traders who are even more bold you could look at buying 1 March call and selling 2x of the further strike calls to reduce or even eliminate theta. (Time Decay)

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it



I am short: SIAL, RAX, TMO, PBI, FXE, DB

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.