VIX - Options Volatility Sonar: Wednesday Recap

by: Erick McKitterick

VIX - Market Sentiment:

After a 2 day rest due to "Superstorm Sandy" the markets re-opened Wednesday with futures pointing higher. All things considered, futures traded in a fairly tight range if you take into account the markets had been closed for the last 2 days. Futures traded all the way up to 1418 before selling off into the close trading down near almost touching the 1400 level yet again. I continue to believe the SPX will test the 1394 level before we see higher prices, as 1420 seems continues to be significant resistance. The NYMO Oscillator rose Tuesday to -37.34 , which continues to tell us the market is weak but no where near in "Oversold" territory.

Today (Wednesday), even powerhouse Apple (NASDAQ:AAPL) was hit after CEO Tim Cook shook up senior management within the company. AAPL traded down, touching the 200 day moving average again before finding support with some buyers. Other news weighing on stocks was Baidu (NASDAQ:BIDU) which had a terrible earnings report combined with a very negative outlook. One positive note was earnings out of General Motors (NYSE:GM) today beat both on the top and bottom line, lifting the auto sector in general.

The spot CBOE Volatility Index (VIX) moved slightly lower at first before climbing throughout the morning. Today the VIX actually exceeded the front month implied futures for a brief moment before pulling back. The oscillator dropped initially to the 17.56 mark before rebounding to and actually exceeding the 18.80 level. This makes volatility ETF (NYSEARCA:VXX), 2x ETF (NASDAQ:TVIX), and alternative 2x ETF (NYSEARCA:UVXY) extremely interesting as here you can make a killing either long or short depending on your thesis. Those who believe the market will continue to roll over the VXX 1:2 call spreads could really be profitable and would capitalize on the increase in volatility. However, for those who believe the market is done going down, the structure of VXX could allow put spreads to be extremely profitable. I personally believe the next leg could very well be down but am not hedging with VXX but instead with S&P ETF (NYSEARCA:SPY) puts as the index puts are much closer to realized volatility than VXX and do not suffer from the structure problems. VIX futures are below.


  • November VIX futures 18.60

  • December VIX futures 19.10

  • January VIX futures 20.40


  • November VIX futures 18.45

  • December VIX futures 19.13

  • January VIX futures 20.28

Options Paper:

In what seemed to be a flat to negative tape, a few bulls today did show up in the world of retail. Discount retailer TJX Companies (NYSE:TJX) who hold T.J. Maxx, Marshalls, Winners, HomeGoods and other discount stores saw a large buyer come in today acquiring 5.6K of the November 42.50 calls. This drove premiums from .55 all the way up to .75 as volatility continued to rise showing buying pressure. This 300K bet is a simple bet believing TJX is headed north somewhere in the next 17 days. This comes on a day where option paper was scarce at best. Option volume in TJX was more than double in this name with calls outnumbering puts more than 4:1. I tried to get a fill, but at the time of this writing was unable to get a fill.

Another bullish play today came in the form of Rockwell Automation (NYSE:ROK). The November 70 calls were bought more than 2K times for 2.05 moving the premium north of 2.30 before the trade finished. Option volume in this name is very light normally so spreads are wide and difficult to trade so use of spreads could help offset the cost of one looking to follow this 400K+ bet. Option volume is more than 11x average daily volume with calls outnumbering puts more than 30:1.

As anyone who follows my articles knows I'm no fan of Netflix (NASDAQ:NFLX) and I closed a short on it just last Thursday when the option paper suddenly got bullish. This was after terrible earnings report so the bullish paper caught my eye and thus I closed my short. Interestingly enough, the 65, 67.50, 70, and even 75 calls weekly calls were bought heavy last Thursday and Friday. Just when you think these calls were going to expire worthless, today Carl Icahn disclosed a 9.9% stake in NFLX, sending shares soaring more than 20%, halting the stock twice. Interesting part regarding this was the 70 calls today were bought at a low of .29 and sold at a high of 14.40 as of the writing of this article. Yes, those 16K calls which were bought for what appears to be pennies are now worth millions after this announcement. I was lucky enough to cover my short in NFLX last week on this activity but did not go long, which now will make me cry myself to sleep. Option activity has radically changed and I will continue to monitor for the next trade, but it appears the call buyers calls last week are now selling the calls for a massive profit.

Popular ETF's and equity names with bullish / bearish paper:

Bullish Option Flows

  • Semiconductor ETF (NYSEARCA:SMH) large May 27-31 call spread more than 1.6M in premium

  • Quanta (NYSE:PWR) more than 14x average daily volume in calls mostly bought on offer

  • TripAdvisor (NASDAQ:TRIP) large buyer of 31-35 call spread bought by selling 25 puts (I followed this one)

Bearish Option Flows

  • Western Union (NYSE:WU) massive call selling combined w/ put buying

  • JDS Uniphase (JDSU) after missing earnings puts were more than 12x average daily volume

  • Herbalife (NYSE:HLF) put buyers possibly buying protection

As always happy trading and stay hedged. Remember equity insurance always looks expensive until you need it!



Closed Long: N/A

I am short: FE, FXE, FXY, SPY

Closed Short: N/A

I have no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.