VIX - Options Volatility Sonar: Tuesday Recap

by: Erick McKitterick

VIX - Market Sentiment

Tuesday S&P futures were weighed down by fears returning out of Europe. Futures traded in a very tight range moving just 5 points top to bottom yet still managed to pull off a fairly flat open. In the first 30 minutes the SPX continued to move lower heading into the factory orders number release. The initial read was a miss with a number of 1.3% vs. an expected 1.5%. However, it is important to note futures only lost 3 handles after the release of this number. Typically these numbers do not really move the market so this is not a surprise. Important numbers are slated to be released tomorrow with ADP Non-Farm Payroll and ISM numbers both on deck.

The spot CBOE Volatility Index (VIX) moved higher although just fractionally heading into the noon hour. Volatility ETF (VXX), 2x ETF (TVIX) and alternative 2x ETF (UVXY) were mostly flat which tracked the futures almost tick for tick. The contango effect continues to weigh on these ETFs as the negative roll hurts these instruments even when the VIX futures are flat. Futures pricing is listed below.


April VIX futures 17.00

May VIX futures 18.85

June VIX futures 20.68


April VIX futures 17.20

May VIX futures 19.25

June VIX futures 20.83

The VIX and VXX options have been very active of late but somewhat tailed off today. Option activity was below average but bears and bulls of volatility continue to do battle. Interesting move in treasuries today was the response to the FOMC minutes. Treasuries fell off a cliff after the release of the minutes signaling no QE3. This was death for Treasury ETFs (TLT) and great for 2x short (TBT). I still believe the treasury market is the long-term next bubble as those invested in treasuries will continue to suffer as the central bank continues to unload a massive balance sheet of treasuries.

Options Paper

Seems as if Apple (AAPL) is on the sonar almost every day and the options activity was again very active today. Today almost 700K option contracts traded before noon with 250K going off in the first hour accounting for more than 12% of all options traded. Although yesterday saw option premium clearly to the upside today it is much more split as some position for a potential pullback. Both May and June puts saw some large buyers step up today. As of the writing of this the largest trade today was a June 500-450 put spread which went off for 2.50 1,400 times in a single block. This single trade cost 350K to put on the trade, but would explode to 7M if AAPL traded down to 450 prior to June expiration. AAPL traded more than 1.2M contracts on the day with calls outnumbering puts 1.7:1.

DR Horton (DHI) has been charging higher of late but at least one bear thinks it is due for a pullback. Today almost 13K of the May 14 puts traded in a single block at .51. This buying pressure was confirmed with positive net premiums and increased bid/ask just after the trade went off. DHI is a name I have been short on before and had my head handed back to me but it appears DHI is struggling to get and stay above the 15. With the history on this I could actually take a shot at this but would like to see IV come in a bit from the current levels. Puts outnumbered calls more than 10:1 on the day with 96% of OTM puts of were bought on the ask.

Popular ETFs and equity names with bullish/bearish paper:

Bullish Option Flows/Percentage of Out of the Money Calls Bought On Ask:

Staples (SPLS) 95% (Long term bullish risk reversal)

Harvest Natural (HNR) 88%

TriQuint (TQNT) 76%

Micron Technology (MU) 63%

Murphy Oil MUR) 59%

Keryx (KERX) 50%

Supervalu (SVU) 50% (Bottom Fishing)

Advanced Micro (AMD) 47%

Bearish Option Flows/Percentage of Out of the Money Puts Bought On Ask:

Star Scientific (CIGX) 99% (Basically a bet the company would fail)

OmniVision (OVTI) 75% (Large blocks of puts bought on ask)

Lihua International (LIWA) 70%

eBay (EBAY) 66% (Looks to be short covering of previous puts so would be bullish)

American International (AIG) 50%

VXX 35% (Large player looks for rally to continue)

Volatility Explosion

China XD Plastics (CXDC) had a roller coaster of a ride today and the options were moving heavy in this name. Again something which typically does not trade many options the puts were on the move today in this very illiquid name. On a typical day only 185 puts trade on average but today more than 7.5K puts traded. It is important to note of the 7.5K puts trading more than 59% were bought on the ask showing a rush for protection. This is confirmed by the dramatic increase in CXDC implied volatility rising almost 50% relative to yesterday. With CXDC's IV trading near a 52 week high of 194.85 straddles and options in general have become extremely expensive here. The 5 put strikes across multiple months were very active today. Keep an eye on this stock as IV is signaling a big move in the upcoming days.

Volatility Implosion

Keegan Resources (KGN) is not a typical name in terms of options but today after trading almost 9x average daily volume the heavy call selling was interesting as IV dropped more than 33% relative to yesterday. KGN reported disappointing guidance last night and today call sellers came out in full force selling calls on the bid more than 59% of the time. Although this name only trades 271 options average a day today was big for this name as more than 2K options traded with calls outnumbering puts 21:1.

As always happy trading and stay hedged.

Remember equity insurance always looks expensive until you need it.



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.