Quick VIX

Yesterday Spain presented a budget that included spending cuts, no tax hikes, and an optimistic view of economic growth next year. This sent US stocks higher on the day which spilled over into China’s Hang Seng. However, this morning in Europe is lower and Spain’s benchmark IBEX index is set to close down 5% on the week. Later today the results of Spanish bank stress tests are due which could be market moving news. Yesterday’s unusual options activity occurred in YHOO and GLD. Yahoo’s stock has had a tough year; down 1.5% while the S&P 500 is up 13.3%. But one options trader is better that the company has better times ahead of it. Yesterday we saw someone buy the November 17/18 call spread for a net debit of $0.12. This is a bullish spread that returns $0.88 if YHOO is above 18 at expiration and only looses $0.12 if YHOO is below 17 at expiration. With YHOO closing yesterday at 16.04, this option trader is expecting the stock to appreciate 12% over the next 49 days. There are sev...

The major news overnight was that the People's Bank of China injected 365 Yuan ($57.92 billion) into the economy this week in order to stimulate the economy. This booted overnight risk sentiment and has US stocks in positive territory this morning. Yesterday as MSFT fell for a fourth day in a row we noticed option traders stepping into the market to buy long dated calls. The biggest trades of the day were the purchase of 12,000 Jan. 40 calls for $0.59 and the purchase of 7500 Jan. 27 calls for 4.80. The 40 calls will turn a profit if MSFT is above 40.59 at expiration, a 35% move higher, and the 27 calls will make money if MSFT is above 31.80, a 5% move higher. Yesterday MSFT touched its 200-day moving average, which stopped the stock's decline and acted as support. These option trades show traders are willing to bet that this is a turning point in the stock and that it will see a sharp rally into 2013. Microsoft has several market moving events ahead on its calendar for Octobe...

Yesterday’s sell off in US equities spilled over into the Asian and European sessions, sending the Nikkei down 2.03% and the DAX down 1.92%. There has been lots of attention on protests in Spain recently, which has spooked markets and sent Spanish 10-year bond yields above 6%. Rising bond yields mean that a Spanish bailout from the ESM will be sooner rather than later. Tomorrow Spain will release their new budget which will include austerity measures and reforms. The market’s reaction to this, as seen through the EUR/USD cross, Spanish bond yield and Bunds, will be an important barometer of the market’s expectations for Spain. If the budget induces risk-off selling Spain could be forced to ask for a bailout as soon as this week. If the market seems satisfied with the budget Spain could wait until Oct. 21 regional elections are held to ask for a bailout. Yesterday AAPL led the market down, closing down 2.5% on the day. As a result implied volatility in October options popped 10.7%. Thi...

European equities traded slightly lower heading into the North American crossover with little newsflow to prompt market direction, as investors continue the wait-and-see play for any major developments from the Eurozone. Nonetheless, some modest risk-off sentiment is observed in the equity space, with financials underperforming the broader indices. US stock futures currently trade higher, indicating a modestly higher open on Wall Street today. (ZeroHedge) Yesterday we saw bullish option trading in Viacom, with one trader buying 60,000 December 60 calls for 0.50 with the stock at 54.59. This is an aggressive bullish bet that the stock will continue its strong trend upward into the end of the year. This trade breaks even if VIAB is at 60.50 at December expiration, which would require an 11% move up in the next 87 days. Yesterday Deutsche Bank raised their price target on the stock from $57 to $62 citing improving Nickelodeon ratings. Another name that had unusual activity yesterday was ...

This morning S&P futures are lower ahead of the market open. Sentiment in the European session as negative after the German IFO business climate index was reported at 101.4, the fift consecutive monthly decline. In particular European basic materials equities are being sold as fears of a Chinese slowdown continue to weigh on the sector. Gold, silver, and crude oil are all lower as well with the US dollar higher. Friday we saw unusual options activity in XRT and FB. XRT is the SPDR Retail ETF, and one trader is betting it will make a big move before October expiration. 27,975 60 Oct. puts and 27,975 Oct. 68 calls were bought on for a net price of $0.30. With XRT at 64.02 at yesterday’s close, this strangle makes money if the stock moves above 68.30 or below 63.70 at expiration. A strangle is a spread option traders use when they believe a stock is about to make an explosive move but are unsure of the direction. The spread is also used when they believe a stock’s implied volatility ...

This morning stocks, gold, and crude oil are all higher with VIX futures lower. This risk appetite is being driven by a report in the Financial Times that EU authorities are in “fresh talks” with the Spanish government to iron out details of a bailout before it is formally requested. This has helped the Euro regain the 1.3 level after selling off hard yesterday. Prior to Oracle’s earnings report yesterday after the close, one trader bought 20,307 Oct. 32 puts for $0.79 and sold the same number of the Jan. 34 calls for $0.98. This spread, known as a collar, was put on for a net credit of $0.19 and was likely used to protect the downside risk of holding a long stock position through the earnings announcement. Spreads like these are useful when you are long stock and bullish over the long term but believe the stock could dip in the near-term. By buying the Oct. 32 puts the trade is able to eliminate risk below that level. However, by financing the puts by selling the Jan. 34 call the tra...

With GM backing off four month highs one option trader is getting bullish on GM but is using a time spread as a cautious way to play the upside. The trader bought 13,300 January '13 20 calls and sold an equal number of Jan. '14 calls for a net credit of $1.30. The trader gets to keep this premium if GM stays above 18.70 through Jan. '13. This position is similar to being short the Jan. '13 20 put but instead of being short volatility, this trade benefits if volatility rises into Jan. '13 and implied volatility in Jan. '14 remains unchanged.  Unrest in China has forced the closure of several Japanese auto manufacture's plants which is causing major disruptions throughout their supply chain. GM's supply chain remains unaffected and could potentially see this situation translate into relatively higher margins and sales. The time spread traded today stands to profit from this scenario and will return 4% annualized if GM remains above 20. However, since...

This morning S&P 500 futures are pointing to a lower open as the Chinese September PMI was reported at 47.8, a level which points to economic weakness. The European composite PMI was also released overnight and was lower than expected at 45.9. This sent the Shanghai Composite down over 2% and has the Euro backing off recent highs into the sub 1.30 range. In the US initial jobless claims came in at 382K, which was worse than the consensus expectation for claims of 373K. Yesterday’s unusual options activity focused on clothing retailers: we saw a trader buy a 2x1 put ratio spread trade 24,922 times in JCP and another roll a short at the money put position in TJX from September to October 25,218 times. JC Penny is a US retailer currently going through a major restructuring to target higher end shoppers, while TJX is a off-apparel retailer that owns TJ Maxx and Marshals. The sentiment expressed in these trades favors bearish macro view in which shoppers will favor discount, value orie...

Yesterday there was unusual options activity in FXI and EWJ. 40,000 FXI Oct. 30.5 puts were sold for $0.09 and separately 20,000 EWJ Jan. 10 calls were bought for $0.13. Selling an FXI put is a neutral to bullish strategy that profits if the ETF is above 30.41, 13.5% above yesterday’s close, at October expiration. The EWJ long call is a bullish strategy that profits if the ETF is above 10.13 at January expiration, a 8% move higher. The bullish tone of these trades is interesting given the predominately negative tone of news out of the region. Protests have sprung up across China as the Chinese rally against the Japanese purchase of an island the Chinese claim as their own. The protests have become severe enough that Japanese auto manufacturers have temporarily closed their plants in China. However, these large trades show that some traders do not expect this to hold back the Chinese and Japanese stock markets in the coming months and are gaining long exposure now. Another large ...

Yesterday's biggest options trades again involved the financial sector as we saw traders continue to buy Bank of America call options. The BAC Nov. 10 Calls traded 58,000 in a trade above the ask for $0.33, and at the same time 52,772 BAC Nov. 9 calls traded above the ask at $0.77. This trade profits if Bank of America is above 10.06 at November expiration, which is a 8.2% move from yesterday's close. Another large option trade involved the XLF yesterday: a trader sold 50,000 December 17 calls for $0.27 and also sold 25,000 December 16 puts for $0.61. This is a 2-by-1 short strangle and  profits when the stock remains range bound and implied volatility drops.     We suspect twice as many calls we sold as puts in order to flatten the trade's delta so that the position is a purer play on implied volatility dropping. This type of trade makes sense for someone who is long calls in a financial stock like BAC or JPM and wants to hedge themselves in the event those stocks...

On Friday we saw options traders continue to gain long exposure to US financials and emerging markets, all of which are likely to appreciate as a result of QE3, but also noticed traders hedging themselves against the current trend of a weakening US dollar and rising S&P 500. We saw 101,039 XLF Oct. 17 Calls trade on the ask for $0.12 as the ETF broke out to a new 52-week high. Friday’s put-call ratio in this ETF was 0.124, showing that traders are definitely expecting a continued move to the upside. This trade profits if XLF is above 17.12 at October expiration in 32 days, a 5% move higher from Friday’s close. We also saw 54,087 EEM Oct. 43.5 Calls trade above the ask for $0.744. This trader is betting that EEM will be above 44.244 at October expiration, a 4.5% move higher from Friday’s close. In contrast to these bullish bets, we saw a trader buy 25,890 IWM Nov. 82 puts at the ask for $1.34 and finance this by selling an equal number of Nov. 78 puts for $0.66. The net cost of thi...

Yesterday 20,039 EEM September 41.5 calls were bought at the ask for $0.37 and 51,558 EEM Nov. 36 puts were bought at the ask for $0.35. VXEEM, the CBOE Emerging Markets ETF Volatility Index traded down near its 52-week low, and this trade was a bet that volatility is bottoming out and will increase. EEM closed yesterday at 41.68, so the call strike is much closer to the money than the puts. This suggests the trader is also bullish on emerging markets but is protecting himself should there be a strong reversal and a break of support in the 37 area. Yesterday we also saw a lot of call buying in the financial sector as traders made bets banks would rally into November expiration due to Fed easing. On trader bought 38,671 BAC November 10 calls for $0.26. Bank of America’s 52-week high is 10.10, and this trade is a bet that the bank trades higher than that in the coming months. We also saw a trader sell 44,211 XLF Oct. 17 calls and buy 40,000 XLF Nov. 17 calls for a net debit of $0.09. Th...

Yesterday we saw heavy put buying in TLT, the iShares Barclays 20+ Year Treasury Bond ETF as 5,000 October 122 Puts traded on the ask for $2.52. This bearish activity follows the recent news that Bill Gross cut his Treasury bond holdings to 21% from 33% of his Total Return Fund, the world’s largest bond fund. The way we are trading treasuries is to replace a long TLT position with a short out of the money, long dated put. This gives us exposure to fixed income and locks in an entry price we are happy with if TLT continues to experience short term weakness. Yesterday we also noticed heavy call selling in GLD, the SPDR Gold ETF. 12,000 GLD September 161 calls were sold below the bid for 7.125, and 12,000 GLD September 166 calls were sold below the bid for $3.25. Price action in GLD will be sensitive to the outcome of the Fed meeting, and this trade appears to be a trade positioning himself to profit from a “buy the rumor, sell the news” scenario. We remain long term bullish on gold but ...

Early this morning the German Courts approved the ESM with the stipulation that German liability to the fund cannot increase without Bundestag approval. The news has sent the Euro and gold higher while Italian and Spanish bond yields have fallen. Today Apple is expected the unveil the iPhone 5 during a press event kicking off at noon CST. History has shown that Apple stock rallies into the announcement and then sells off the week of before continuing its rally. We have seen this pattern hold true this week. Yesterday we noticed abnormal weekly call option volume in Apple with the majority of volume going off at the ask. This suggests traders are buying weekly call options in anticipation Apple’s stock will head higher into Friday’s expiration. All call strikes from 660 to 680 were active. Yesterday we also saw an unusually large VIX trade: the Dec. 24 / Nov. 18 strangle was purchased 72,435 times. This trade was part of a roll forward to give the trader long volatility e...

On Friday US stock indices rallied to close at the top of their weekly range. We saw lots of call buying, particularly in the financial sector, as traders bet on banks to lead the market higher due to supportive measures from the ECB and possibly the Fed. 10,000 BAC Oct. 9 Call traded on the offer at $0.31. This suggests a trader was buying October calls, anticipating that BAC would be above 9.31 at October expiration. Bank of America has recently formed a double bottom formation at 7.00 and moved sharply upward on heavy volume last week through resistance at 8.30. 30,000 EWJ Jan. 10 calls traded on the offer at $0.09. EWJ is the iShares MSCI Japan Index Fund, and this options trade suggests that the trader is bullish on Japanese equities. The breakeven price of this trade is 10.09, which is just below EWJ’s year-to-date high of 10.20. 80,000 XLF Oct. 16 calls traded on the offer at $0.20. The XLF is the SPDR Financial Select Sector ETF, which rallied hard last week. XLF’s 2012 high i...

Risk assets were up across the board yesterday following Draghi’s announcement that the ECB would initiate an unlimited bond buying program. US equities were up 2%, Spanish 10-yr bond yields fell below 6%, and the Shanghai Composite jumped 4%. Industrial production also unexpected increased in Germany and the UK, helping to fuel the rally. The EUR/USD currency pair is currently up over 1%. Following Draghi’s speech the ball is now in Spain’s court. The new question is what will the terms of a Spanish bailout be? Terms have yet to be made public but they are likely being debated already. Spain has already pushed through their own austerity measures and will likely try to convince Germany that these are all that is needed. In the US the non-farm payrolls report showed a gain of 96,000 jobs, missing expectations of a gain of 125,000. The unemployment rate ticked down to 8.1%, mostly due to a shrinking labor force. The July NFP numbers were revised down 22,000 to 141,000. The news caused...

In Europe: ECB president Mario Draghi announced that the European Union’s benchmark interest rate will remain unchanged at 0.75%. However, in order to provide easing the central bank will undertake Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds. There will be no quantitative limit on the size of these purchases,all purchases will focus on short term debt, and all purchases will be fully sterilized. Draghi says this is fully within the ECB’s mandate. Draghi also said separate press releases will detail the OMTs and a change in collateral requirements. In the US: “Seeing strength for tomorrow's employment report, ADP estimates private payrolls in August will rise 201,000. This is well above the high end of expectations at 165,000 and also well above ADP's revised level for August of 173,000.” (Barrons) “Layoff announcements are lower, according to Challenger's count for August which is 32,239 for the second lowest of the recovery. Layoff anno...

The situation is Spain continues to deteriorate and it is beginning to look “like the beginning of the end” as the WSJ reports that Spanish banks have activated an emergency lending program which allows them to bypass the ECB’s collateral requirements and borrow directly from the bank of Spain. This is the same path Greece, Portugal, and Ireland took to their bailouts. Spanish finance minister Luis de Guindos said Spain is not ready to sign over full fiscal sovereignty to the EU in a full blown ECB bailout, saying he wants clarification of the terms first. This comes as German Chancellor Angela Merkel leaves for Madrid to discuss the terms of a rescue of up to 300 billion euros beyond the 100 billion euro rescue already agreed upon. It would appear that Germany is fully behind Draghi’s plan to buy bonds to rescue Spain as Jorg Asmussen, Germany’s ECB board member said today “The risk premia of sovereign bonds now reflects not just the insolvency risk of some countries but an exch...

While traders in the US were out of the office for the long weekend Europeans markets jumped higher on comments from ECB president Draghi that the central bank can buy government bonds with maturities of 2-3 years without breaking EU treaties. This has sent Spanish and Italian bond yields sharply lower and the Euro higher against the dollar. Also notable from Europe is that Moody's cut its outlook on the EU's medium and long term AAA bond ratings from stable to negative. This was done to reflect Moody's negative outlook on Germany, the Netherland, France, and the UK. Next week the German Supreme Court will rule on the legitimacy of the ESM. German finance minister Schaeuble said that the German government had carefully reviewed the treaties and could find nothing in contravention with the German constitution (Reuters). Nonetheless the event will likely drive more volatility into the market as the decision approaches on September 12th. In the US this morning the key data re...