VIX - Options Volatility Sonar: Thursday Recap

by: Erick McKitterick

VIX - Market Sentiment

Thursday it appeared the bulls were somewhat on their heels as the S&P traded down right out of the gate. The market again moved as downward pressure continued to push the averages lower. However, again after a short breather the bulls once again stepped in trying to keep the accelerated uptrend in tact.

This move again was perfectly telegraphed from the CBOE Volatility Index (VIX). Popping hard into the open the spot VIX moved down hard showing yet again little fear in the market. Again traders who were long volatility ETFs (NYSEARCA:VXX) and 2x volatility (NASDAQ:TVIX) were crushed but the VXX puts I noted in Tuesday's sonar report had huge gains today. The futures which these instruments are priced off of are below.


March VIX futures 21.95

April VIX futures 24.63

May VIX futures 25.68


March VIX futures 20.45

April VIX futures 23.25

May VIX futures 24.70

In direct contrast to the last 8-10 trading sessions the S&P ETF (NYSEARCA:SPY) and Nasdaq (NASDAQ:QQQ) put buying fell off dramatically today. These puts were being bought at the ask more than 50% of the time. In comparison today puts were bought only 43% of the time going into the noon hour and calls 46%. Again overall market paper looks bullish which is why the spot VIX and VIX futures are fading so hard. The truth is we are at a very interesting point here. All the paper in the VIX options is either going to have those who are short volatility with a very big pay day over the next 3-4 weeks or we will have some type of market correction. VIX future volatility is trading at an amazing 200% over current market volatility meaning if we do not get any type of correction to the downside those who are long VIX puts and short VIX calls could be in for some very good dinners in the future.

Options Paper

Overall option paper was modest today. However, one which has me intrigued was a large May 4/5 risk reversal in Frontier Communications (NYSE:FTR). This was a speculative play Friday stock I had listed in the sonar report back on the dip below 4.00 and option holders of the four calls were paid when the stock rallied to the 4.80 level. Last week I exited the trade and now it appears one trader is stepping in calling a floor under FTR. The four puts were clearly sold but the five calls were interesting. The five calls half the block went off for .15 and the other half went off for .10 so on my system it reads half bought and sold at the same time. Nonetheless option paper is more than 12x average daily volume and is building. I'll keep my eye on this as we move forward as OI could be key as to sentiment.

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

Calls outnumbering puts:

Spectra Energy (NYSE:SE) 27:1
DR Horton (NYSE:DHI) 21:1
Firstenergy (NYSE:FE) 19:1
Anheuser-Busch (NYSE:BUD) 18:1
Edwards Life (NYSE:EW) 14:1
Omnicare (NYSE:OCR) 14:1
RenRen (NYSE:RENN) 14:1
Expedia (NASDAQ:EXPE) 23:1

Puts outnumbering calls:

Termo Fisher (NYSE:TMO) 12:1 (Odd price action)
Activision (NASDAQ:ATVI) 4:1
Jaguar Mining (NYSE:JAG) 4:1
Walt Disney (NYSE:DIS) 5:1
Host Hotels (NYSE:HST) 6:1
Citrix Systems (NASDAQ:CTXS) 7:1
Textron (NYSE:TXT) 14:1
SLM Corp (NYSE:SLM) 16:1

Volatility Explosion

Clearwire (CLWR) saw implied volatility increase more than 16% today on little to no option volume. CLWR has traded down since earnings but today it appears some bulls are trying to nibble again as 41% of calls were bought on the ask. The Mar 1.5 and April 2.5 calls were bought and Jan 13 3 calls were sold. Overall the options were average today with calls outnumbering puts more than 7:1. I would not make too much of this as open interest on the calls continues to fall. (NYSE:CRM) had very heavy option activity today mostly pointing bullish. The majority of puts appear to be sold and calls bought. I decided to play this using a call backspread where I sold the 130 March call and bought 2x of the 135 Mach calls and sold a weekly 145 against it. Net net this basically gets me long for 0.57. I then sold the volatility of the weekly puts for .55 so I am now risking just .02. Options were more than 10x average daily volume going into earnings.

Volatility Implosion

Safeway (NYSE:SWY) I noted had a large buyer of puts into the close and sure enough crazy price action today trading down more than 10% at one point. Puts were flying off the shelves today as investors ran for cover after weak earnings and guidance. Puts bought on the ask more than 49% of the time and was trading more than 14x average daily volume.

VIVUS (NASDAQ:VVUS) today saw very interesting volatility moves. Although overall implied volatility came in big time today moving down from 239 to 105 on good news from a new diet drug. However interesting today calls were sold overall and puts bought more than 41% of the time as long shareholders reach for some cheap protection here. The January 15 puts and Jan 25 appear to be a collar where the calls were sold and puts bought. Calls were sold where puts appear bought both for 3.40 protecting almost 5M shares for 0.00. Option volume was more than 10x average daily volume.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.


I am long SDS, APC, TBT

I am short: PBI, FXE, DB, EEM, AAPL, FSLR, LYV,

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.

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