VIX - Options Volatility Sonar: Thursday Recap

by: Erick McKitterick

VIX - Market Sentiment

Thursday the markets continued to digest the wild move to the upside with S&P futures pulling back. Worries on global growth had futures pulling back after both China and Germany reported soft manufacturing data. Futures did tick slightly higher after the unemployment claims data hit a reported four-year low. Tomorrow watch out for new home sales set to be released at 10:00 as it could move homebuilder stocks.

The spot CBOE Volatility Index (VIX) was up more than 5% after some large put buyers came into the market looking for some short term protection. This helped drive the futures up higher which was positive for the volatility ETF (NYSEARCA:VXX). However, 2x volatility ETF (NASDAQ:TVIX) was crushed today on a day when the pricing should have been up big. This is simply due to the TVIX trading a huge premium to its nave ever since Credit Suisse (NYSE:CS) stopped creating new shares. I would love to say some of this premium came out today but it's just not true. This has message boards and my inbox lighting up with questions regarding why. The answer is simple: The premium to NAV combined with HUGE selling pressure today drove the TVIX more than 16%. Again this divergence is one we preach on the sonar report to watch out for as holding these positions can be extremely dangerous if you do not fully understand what is being traded. Another volatility ETF (NYSEARCA:UVXY) traded more in line with VXX and VIX futures, rising 6%. VIX futures are priced as shown below.


April VIX futures 18.53

May VIX futures 21.38

June VIX futures 23.10


April VIX futures 19.30

May VIX futures 22.08

June VIX futures 23.45

Yesterday the sonar pointed out Treasury ETFs (NYSEARCA:TLT) and 2x inverse (NYSEARCA:TBT) both signaled early signs of weakness in the market. TLT has rallied significantly over the last two days and continues to build up here. Option activities in these names today were selling of both calls and puts so direction is difficult to tell here. The S&P ETF (NYSEARCA:SPY) 10-day moving average is at 139.68 and as of the time of this writing has spent all day below which would be a short term bearish sign. If you combine this with a large buyer of the quarterly (March 30) 137-135-133 put fly which was bought 25K-50K-25K times and the 139-137-135 put fly bought 10K-20K-10K times. Both of these are directional bets to the downside believing the market could continue to take a breather over the next week. Implied volatility spiked today in SPY puts as both calls and puts were bought more than 42% of the time.

Options Paper

McKesson (NYSE:MCK) has been a great trade in sonar reports in the past. MCK today saw another bull step in buying more than 6K of the April 90 calls. The majority of this trade went off in two large blocks 2.5K each one at .64 and one at .63. The bid x ask at the time was .50 x .60 so this appears to be a clearly bought naked call. No stock is tied with these transactions and thus appears to be an outright bullish bet on MCK. Option volume in the calls was more than 2x average daily volume with calls outnumbering puts 32:1.

Apple (NASDAQ:AAPL) again today saw higher than average option contracts in trading. However, the big change here is instead of trading some 1M contracts we traded a small 650K going into the final hour of trading. Average contracts in this name have skyrocketed of late moving from 520K a day to 646K contracts per day on this massive AAPL run. Today option activity was very bearish on a net premium basis. Net premiums on the call side were negative in a very big way with -7.8M on the call side and a positive 12.2M on the put side. This was almost all from a large put trade that went off at the April 515, 510, 500, and 495 - the puts were all the top trades in terms of blocks today. Watch to see for open interest changes as these were more than likely rolls out to May expiration.

The Ultrashort Treasury saw yet another large call spread buyer today. This time the April 21 - 23 call spread was bought 15K times for .40 offer. This 600K bet could be worth as much as 3M if TBT closed at or above 23 going into April expiration. Calls were heavily bought in today's session with one trader buying the March 21 weekly (expiring tomorrow) 21 calls for .06 4,808 times. This appears to be a cheap shot play. TBT would rally heavy tomorrow back to the levels seen just two days ago. Calls outnumbered puts 3.3:1 on 1.5x average daily volume in TBT.

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

Calls outnumbering puts:

Hertz (NYSE:HTZ) 53:1

US Gold Corp (NYSE:MUX) 53:1

Collective Brands (NYSE:PSS) 25:1

TripAdvisor (NASDAQ:TRIP) 24:1

American Eagle (NYSE:AEO) 21:1

Verifone Holdings (NYSE:PAY) 16:1

Thoratec (NASDAQ:THOR) 168:1 (April to May call roll)

Puts outnumbering calls:

Kohnl's (NYSE:KSS) 8:1


Western Refining (NYSE:WNR) 7:1

Wellpoint (WLP) 7:1 (Big June to Sept put roll)

US Airways (LCC) 13:1 (Airlines saw heavy puts today)

Volatility Explosion

Rangold (NASDAQ:GOLD) saw IV scream to the upside today after put and call buyers were both very active in this name. GOLD dropped more than 11% in today's trading and options were flying off the shelves. Increased call selling to buy puts was evident today as supported by 31% of calls being sold on the bid whereas puts were bought 54% of the time at the ask. Option volume was more than 10x average daily volume in this name today.

Vivus (NASDAQ:VVUS) has been flying high since early February and is now coming back to where the price gapped up. On an options day yawner today on just half average daily volume puts and calls were under heavy buying pressure. Although calls were being bought much more than calls in a pure numbers standpoint the puts percentage was higher. Of the 10K calls which traded 38% were bought on the ask where of the 2K puts 66% were bought on the ask. Implied volatility climbed back to the 160 level as calls outnumbered puts 5.2:1 on the day.

Volatility Implosion

Lululemon (NASDAQ:LULU) today saw implied volatility collapse more than 25% relative to yesterday. LULU reported a good quarter on increased profit and sales. The options today were very bullish with puts being sold 40% on heavy volume and calls being bought 43% both on heavy volume. Although calls only outnumbered puts 1.6:1 today the paper was bullish, trading more than 3x average daily volume.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.


I am long APC, TBT, FAZ, KERX, MBI

I am short: PBI, DB, AAPL, LYV, YHOO

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.