VIX - Options Volatility Sonar: Friday Recap

by: Erick McKitterick

VIX - Market Sentiment

Friday continued the charge as we have now closed in the accelerated uptrend an astounding 10 weeks in a row. We still have yet to have a down 1% trading day in 2012 and today was no exception. S&P futures traded in a fairly tight range overnight even after the recent rebound in oil prices has some traders a little more hesitant. Overall news continues to be positive on both the political and macro front so it appears some traders are believing this rally will continue, possibly making the next move to 1415 to 1425 level.

The spot CBOE Volatility Index (VIX) just like days past spiked at the open to melt away quickly as strength comes into the market. VIX contango continues to be extreme which continues to hurt volatility ETFs (BATS:VXX) and 2x volatility (NASDAQ:TVIX). Today as the front month futures traded up they were up fractionally but again futures began to drop toward the close as the Dow attempted to retake 13K.

VIX futures are listed below


March VIX futures 20.30

April VIX futures 23.48

May VIX futures 25.15


March VIX futures 20.50

April VIX futures 23.70

May VIX futures 25.40

Total contracts totaled north of 13M again with Apple (NASDAQ:AAPL) as usual leading the way with more than 550K contracts trading. Today the bears and bulls were working to a stalemate in this tech giant as net premium showed call and put buyers with put flows just slightly heavier than call. Ultrashort Treasury ETF (NYSEARCA:TBT) and Long Treasury (NASDAQ:TLT) had interesting days today as treasuries traded slightly up with the market as one would expect. The U.S. Dollar ETF (NYSEARCA:UUP) reversed today up with the Euro ETF (NYSEARCA:FXE) down across the board. Large index ETF's S&P's (NYSEARCA:SPY), and Nasdaq's (NASDAQ:QQQ) both showed even bets both bear and bull for the most part in today's trading.

Options Paper

The VIX puts sure were active today trading more than 545K option contracts with calls outnumbering puts 1.5:1. Overall the calls 37% were bought on the ask with 99% bought out of the money with the April 28 calls leading the charge ticking higher. This also was somewhat shown when the April VIX futures had moved significantly higher in comparison to the rest of the futures. The June 29's were also active today as some players continue to set up for any type of market correction. Some put buyers remained in today's session which helped keep VIX futures low but this is somewhat expected as VIX typically trades down moving into the weekend allowing for hedges to be put on.

Safeway (NYSE:SWY) has been taken to the woodshed of late and it now appears some bulls think the worst is over. Today a buyer of more than 6.4K March 22 calls between .33 and .35 stepped in driving option premium up. Today calls outnumbered puts almost 7:1 with 82% of the calls were bought on the ask which is very bullish. I'm not so bullish this name but the options market disagrees and one must respect the price action. Option volume was more than twice average daily volume.

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

Calls outnumbering puts:

American Capital (NASDAQ:AGNC) 48:1 (Another Dividend steal nothing to see here)

American Eagle (NYSE:AEO) 157:1

Gold Fields (NYSE:GFI) 103:1

Boise (NYSE:BZ) 68:1

Dollar ETF 52:1


Universal Health (NYSE:UHS) 44:1

General Dynamics (NYSE:GD) 38:1

ON Semiconductor (ONNN) 29:1

Office Depot (NASDAQ:ODP) 27:1

Puts outnumbering calls:

Oil and Gas ETF (NYSEARCA:XOP) 21:1 (Large blocks of puts mostly sold which would be bullish)

SunPower (NASDAQ:SPWR) 21:1

Theravance (THRX) 27:1

ASML Holding (NASDAQ:ASML) 36:1

Materials ETF (NYSEARCA:XLB) 17:1

Lincoln National (NYSE:LNC) 2.6:1 (Large April 23 put buyers today)

Volatility Explosion

Rite Aid (NYSE:RAD) saw volatility scream to the upside as shares rose 10% on the day. The July 2 calls were hot today as early on heavy call buying picked up around 10:30 am sending the stock price soaring. Toward the end of the day some October 3 call sellers came into the market but overall the option market was bullish as calls traded more than 6.5K times in a stock which only sees around 634 total options a day. This 10x average daily volume had calls outnumbering puts an astounding 218:1.

Volatility Implosion

Big Lots (NYSE:BIG) saw IV get crushed after reporting earnings and the stock fell 4% on the day. However IV did not fall as much as one would expect as some call buyers stepped in buying more than 800 of the calls today rolling out positions throughout the day. Overall option volume was 4x average daily volume with calls outnumbering puts almost 2:1 Net premiums suggest some are positioning for a move higher in the upcoming months with puts sold and calls slightly bought.

Speculative Play Friday

So we've seen eBay (NASDAQ:EBAY) and United Technologies (NYSE:UTX) both work with weekly calls producing nice gains. This week's speculative play Friday is actually a short term bearish trade on the gold ETF (NYSEARCA:GLD). Warren Buffett came out this week slamming the precious metal which sent GLD and gold prices plummeting creating a monthly rejection candle. When you see price action which sets a new high just to take out an entire months low in one trading day you must respect the price action. Although net premium suggests put sellers in the April 162 and 163 lines to buy the April 171 calls I am being contrary here buying puts as I do believe the next short term leg is lower. I personally like the 166 - 163 1:2 ratio spread for .35. This allows a trader to make a potential 3.00 off of a .35 bet. I like the risk reward here as this would be where the put sellers would more than likely defend the price action around the 163 level and like the risk reward here. I put on this trade earlier today and could look to add or adjust next week.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.


I am long SDS, APC, TBT, PCLN, FAZ


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.