VIX - Options Volatility Sonar: Tuesday Recap

by: Erick McKitterick

VIX - Market Sentiment

Tuesday the U.S. markets woke up to digest a few different data points. First and foremost the news of Moody's cutting the debt ratings of Italy, Spain and Portugal. Germany then gave us some very positive news with the economic sentiment numbers coming in at 5.4 blowing away forecasts. Then U.S. retail sales disappointed with a reading of 0.4 when analysts were expecting a reading of 0.8. All this mixed news actually had S&P futures down 9 handles off the top.

The spot CBOE Volatility Index (VIX) opened slightly higher but futures were actually up a little more the day before settlement. Volatility ETF's (NYSEARCA:VXX), 2x ETF (NASDAQ:TVIX), were up in the pre-market but overall on a percentage basis were acting as one would expect on a day before VIX settlement. VIX futures are pricing in as below


February VIX futures 19.58

March VIX futures 22.10

April VIX futures 23.45


February VIX futures 19.80

March VIX futures 22.65

April VIX futures 24.13

As with January settlement there is a large divergence here in option settlement premium when it relates to the VIX. If one calculates the total payout of calls and puts at specific strikes you would get the following payout numbers.

If VIX settled at 18 then VIX sellers pay 734M total payout.
If VIX settled at 19 then VIX sellers pay 604M total payout.
If VIX settled at 20 then VIX sellers pay 534M total payout.
If VIX settled at 21 then VIX sellers pay 526M total payout.

If VIX settled at 24 then VIX sellers pay 520M total payout.

This simply means if we were to rally very hard tomorrow morning causing a drop in VIX settlement to 18.00 this would cost the option writers 200M in additional premium. If you remember in the sonar report last month the VIX settlement zone was closer to 25 and the futures were trading at 21ish going into settlement. Then a sell-off at the open caused a print of 23.64 saving the option sellers more than 600M in option premium paid. Although this is not near the divergence of last month it is noteworthy as I would not expect a large drop in the VIX tomorrow at the opening print (settlement) of the VIX. This is not to say we cannot sell off for the first VIX print then rally hard in the afternoon but I would expect a flat to down open going into the bell tomorrow.

Options Paper

The S&P ETF (NYSEARCA:SPY) today saw once again some extremely heavy put flows totaling again more than 2:1 puts outnumbering calls. This number was much higher until a single block around 2:35 came through with a buyer of the March 138 calls 45,000 times. This buyer paid .98 offer for the trade which would equate to almost a 4.5 million dollar bet the S&P will continue higher. This is the first substantial bull call purchase in the last eight days and was bought at the lows of the S&P around the 10 day moving average. Again puts were bought on the ask more than 43% of the time which is consistent with the short thesis of the last eight days.

Yahoo (YHOO) was taken to the woodshed today, dropping more than 1.00 in less than a few minutes after talks regarding sale of Alibaba have broken down. Interesting as implied volatility screamed to the upside and some risk reversal guys came in hard around 2:09 selling the July 14 puts times and buying the 16 calls 25,000 times which again is bullish. Puts were sold on the bid more than 51% of the time with 3 transactions accounting for the majority of this number. Overall option volume was more than 4x averaged daily volume with calls outnumbering puts more than 2:1.

RadioShack (NYSE:RSH) saw a large purchase of January 2014 5 puts today. A single block of 5K puts were bought at the ask today which are two years out from expiration. This appears to be an outright bearish bet or a possible protection of those who are long shares. Regardless this is bearish for the stock and appears to be cloudy days ahead for RSH.

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

Calls outnumbering puts:

Rite Aid (NYSE:RAD) 272:1

Timken (NYSE:TKR) 259:1

Moody's (NYSE:MCO) 136:1

GT Solar (GTAT) 82:1 (Odd on a day where solar stocks hit so hard)

TiVo (NASDAQ:TIVO) 44:1 (Calls have been nuts in this name of late)

US Dollar ETF (NYSEARCA:UUP) 70:1 (Still light volume overall)

Gap Inc (NYSE:GPS) 27:1

Bunge (NYSE:BG) 23:1

Williams Companies (NYSE:WMB) 22:1

Puts outnumbering calls:

ACI Worldwide (NASDAQ:ACIW) 54:1

VIX Short Term (NASDAQ:VIIX) 16:1

Mexico ETF (NYSEARCA:EWW) 14:1

Japanese Yen (NYSEARCA:FXY) 12:1

Kinder Morgan (NYSE:KMI) 10:1

KB Home (NYSE:KBH) 8:1

Hong Kong (NYSEARCA:EWH) 8:1

Jefferies (JEF) 7:1

Paychex (NASDAQ:PAYX) 6:1

Leap Wireless (LEAP) 6:1

Supervalu (NYSE:SVU) 5:1

Volatility Explosion

First Solar (NASDAQ:FSLR) along with many other solar stocks were slapped down hard today. Implied volatility in response climbed as puts were clearly being bought early and calls being sold. Calls in early trading were sold on the bid more than 46% of the time where puts were bought on the ask more than 54 % of the time. This appears to be very bearish and continues to follow negative paper over the last few days. The biggest trade today was a purchase of 11K of the March 39 - 32 put spread for just under 3.00. This again is another bearish bet on this name. FSLR was trading down more than 7% today and it will be interesting to see if we hold the 40.00 level moving forward.

Volatility Implosion

Fossil (NASDAQ:FOSL) saw a big sell off in the pre market only to open and rocket higher back to where it was trading yesterday. The Implied Volatility fell off a cliff dropping more than 29% relative to yesterday. This consumer discretionary stock continues to impress in terms of price action and option movement. Overall no tell in the option pits for follow through as puts and calls appear to be both bought and sold in pretty even marks.

Speculative Play Friday

Investors who like earnings plays will like this speculate play Friday. Rackspace (NYSE:RAX) is a name I have been short and wrong on for quite some time. I still am not huge on the name but option activity shows this cloud stock could be ready for a move higher. Today alone 3K of the February 50 calls were bought and this follows heavy call flows over the last few days. I owned the 43-38 put spread following in a large trade back in December which I closed last week which I took a significant loss.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.


I am long SDS, APC, TBT, NUAN, JBL

I am short: SIAL, PBI, FXE, DB, EEM

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.