VIX - Market Sentiment
Tuesday again saw S&P futures trading slightly down after the European markets were lower in early trading. Futures traded to a high of almost 1343 but opened near the lows around 1334. Today Ben Bernanke testified around 10:00 and the market reacted as normal listening to every word spoken. The market in true bull fashion just retraced or pulled back. Every dip thus far has been bought in full force and both Monday and today any buyers of the open appear to be rewarded.
The spot CBOE Volatility Index (VIX) again traded over 18 at the open. Volatility ETFs (VXX), 2x ETF (TVIX), Proshares (VIXY) and Mid-Term VIX ETF (VXZ) were up in early trading but again were slapped back down as the VIX dove into mid day. The price action today was very straight forward in the VIX futures with strikes again failing to hold gains and futures trading down. Again holders of TVIX and VXX traded down hard and followed the futures as shown below.
Yesterday
February VIX futures 18.30
March VIX futures 20.70
April VIX futures 22.55
Today
February VIX futures 18.48
March VIX futures 20.50
April VIX futures 22.10
The VIX futures are mixed in this case. February futures are actually now trading up 1%. All other futures were trading down across the board. This reduces the contango slightly but overall we have a long way to go before we hit full backwardation. One big VIX play was a roll of the February 25 VIX call to the March 25 strike 30K times. In addition the March 24 - 35 call spread was bought more than 27K times for 1.00 which is a very large insurance bet for insurance or downside plays going into March.
Overall sentiment in the options market when you look at the index funds today was very bearish for such a strong tape. S&P ETF (SPY), Nasdaq (QQQ) and Russell ETF (IWM) all saw bearish flow. None more the SPY which traded almost 2 puts for 1 call with more than 51% being bought at or above the ask. This is important as some large spreads went off today accounting for large pieces of the sold on bid stats. Today more than 8.0 million in calls were sold on the bid where puts were bought with more than 5.8 million moving into puts. The puts appeared to accelerate when long time investor Doug Kass tweeted "Sell Everything." Regardless the market is crazy here and bulls have had one hell of a ride.
Again I believe those looking for a pullback, SDS calls give you the best bang for the buck here. TVIX has no options so hedged moves are not possible but those who like the VXX ... the backspread or risk reversal could be good if you believe a pullback is long overdue. Although I am not a fan of VXX because it is a flawed instrument where the negative roll will kill you in any environment but a sharp selloff. Flat or up markets will kill the VXX in the long term and holding this security could be very painful.
Options Paper
Bank of America (BAC) - everyone's favorite stock of late - has ripped higher since late December. Today however one player is seeing limited upside moving into the March time frame. A large 42K collar was initiated today where the March 9 calls were sold for .12 and the March 7 puts were bought for .17. Net net of this trade insures 4.2 million shares of stock from losses for around 210K. This does cap the upside for the seller of this collar as any price action above 9.00 the holder will not participate. Effectively it protects them fully below 7.00 and allows them to run to the 9.00 level where the holder is willing to let the stock go. This is more than a 12% run here and protects from a large drop between now and March expiration.
Another monster stock - Toll Brothers (TOL) - has had a massive run and today the bears stepped in. A single block purchase of the June 27 puts went off for 4.35 today just before 10:00. The block was not on the bid or the ask but with zero open interest in the strike is a new order for sure. The trade netted the short side a cool 2.175 million and the long side now is effectively short 500,000 shares at 27.00 which is a 20% premium from here. Option volume on the puts is more than 5x average daily volume and puts also outnumber calls 5:1.
Fastenal (FAST) saw a large May 55 put block go off today. The May 55 puts were bought for 7.90 today, more than 5K times and appears to be a bearish bet on FAST which has had a nice run with the market. It appears to be an outright bearish bet as these puts are 7.00 in the money. Puts outnumbered calls more than 6:1 on the day.
Popular ETFs and equity names with bullish/bearish paper in terms of call/put ratios:
Calls outnumbering puts:
American Electric Power (AEP) 101:1
Nexen (NXY) 113:1
Fortress Investment Group (FIG) 58:1
Spectra Energy (SE) 55:1
Applied Materials (AMAT) 54:1
Regions Financial (RF) 46:1
Radian Group (RDN) 42:1
Eli Lilly (LLY) 29:1
Brocade (BRCD) 34:1
PetMed (PETS) 151:1
Fortress Investment Group 58:1
Puts outnumbering calls:
South Korea (EWY) 165:1 (large put seller which would be bullish)
Marriott (MAR) 36:1
Sealed Air (SEE) 15:1
H&R Block (HRB) 12:1
Lorillard (LO) 6:1
Steel Dynamics (STLD) 9:1
DepoMed (DEPO) 6:1
BE Aerospace (BEAV) 6:1
Volatility Explosion
Lions Gate (LGF) has had a monster run and IV has followed the stock price higher. Although slightly lower today it is only a fraction off of its 52 week high. Open interest on the calls has more than doubled and open interest in the puts has almost doubled and it appears no end is in sight. Although options in this name have finally started to cool off as today volume is closer to average of late options have been flying off the tape. Overall the option volume has looked extremely bullish with puts being sold to buy calls. Keep an eye on this one as the implied move for earnings on the 9th continues to tick higher.
Volatility Implosion
Emerson (EMR) today reported a 23% decline in Q1 earnings as flooding in Thailand hurt results in the process management and network power segments. After the report EMR traded down more than 3% and the options market followed. As one would expect the implied volatility came in hard after the earnings release as both long and short holders took their positions. It initially appears the bears have won this battle but it will be interesting to see the price action in the next couple of weeks.
Coinstar (CSTR) reported earnings which beat on both the top and bottom line Monday. A key to note here is CSTR is reported to have a 41% short interest and it appears this could be a big short squeeze candidate. CSTR traded over 60.00 in the premarket and could go parabolic with this very high 41% short float. This is no more evident than in the option market as puts were sold across the board and calls were being bought up across the board. The February 60 and 65 calls were being sold and bought like hot cakes. Although the implied volatility actually dropped on this name more than 26% today the action will be extremely fierce moving forward possibly along the lines of NFLX.
As always happy trading and stay hedged.
Remember equity insurance always looks expensive until you need it.
Disclosure:
I am long SDS, APC, TBT, FTR, NUAN, JBL
I am short: SIAL, TMO, PBI, FXE, DB
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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