Schaeffer's Trading Floor Blog

The Well-Timed $11 Million VIX Bet

Breaking down yesterday's purchase of 100,000 VIX July 22 calls

by 4/16/2014 7:23 AM
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It's 9:55 a.m. ET yesterday, and the markets look like a nice shade of green. And then I get this in an email.

"VIX Jul 22c 100,000 bot for 1.10."

In English, that says a trader bought 100,000 CBOE Volatility Index (VIX) July 22 calls for $1.10. As in, $11 million worth of July VIX calls.

July VIX hovered in the low 17s in early trading on Tuesday, meaning that these calls were about $5 out of the money when they traded.

The buyer timed his VIX purchase quite well. Here's how the market looked yesterday morning.

One-Minute Chart of the SPDR S&P 500 ETF Trust, 4/15/14
One-minute chart of SPY for April 15, 2014
Chart courtesy of TD Ameritrade

Pretty good timing on these VIX calls. The proceeded to drop about $1.50 in pretty much a straight line over the next half hour, then another $0.50 a half-hour later.

Someone's bunny has a good nose!

Generally speaking, we tend to overreact to large VIX call purchases. I say that because they happen all the time. The open interest in July 20 calls is 343,561, for example, and they've probably never been anything but out-of-the-money calls. The general consensus is that some very large players use VIX calls as portfolio hedges and we have to put the size of their dollar commitments into proper perspective. That $11 million might represent a small part of the overall portfolio. So we shouldn't just assume this is a smart-money guy front-running the market. Or a contra-tell either, on the theory that it's a panic-stricken market long. Or maybe just someone who now has tons of ammo to fade general market weakness.

But having said that yowza, what great timing on that purchase, at least as far as the market action went. As for the calls themselves, they only rallied 10-15 cents or so, but I guess that's not exactly chump change making 10% on an $11 million "investment." I strongly doubt they ever buy these for the flip; rather, it's some combo of insurance and a hedge against future bullish market plays.

It's tough to advise anyone to not get carried away with interpreting VIX call purchases after seeing this one. I would still advise it, though, if for no other reason than the fact that virtually every large trade here involves owning dollar cheap VIX paper that figures to explode on a future VIX rally. And by and large, those bets have worked very poorly over the last five years. We just notice the very good trades and conveniently forget the many bad ones that preceded it.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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Options Check-Up: Canadian Solar Inc., Groupon Inc, UnitedHealth Group Inc.

Analyzing recent option activity for CSIQ, GRPN, and UNH

by 4/15/2014 6:02 PM
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Among the stocks attracting attention from options traders lately are solar energy concern Canadian Solar Inc. (NASDAQ:CSIQ), daily deals website Groupon Inc (NASDAQ:GRPN), and healthcare services provider UnitedHealth Group Inc. (NYSE:UNH). Below, we'll break down how options buyers are positioning themselves, and how much speculators are willing to pay for their bets on CSIQ, GRPN, and UNH.

  • Speculators have bought to open puts, relative to calls, at a near-annual-high pace in CSIQ's options pits during the past two weeks, as evidenced by the stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.72, which ranks just 10 percentage points from a 12-month peak. This comes as no surprise, considering CSIQ shares have lost 40% over the past three months to trade at $25.17. Not to mention, Schaeffer's Volatility Index (SVI) for Canadian Solar Inc. comes in at 74%, in the bottom quartile of its annual range, indicating short-term options are cheaper than usual right now, from a volatility perspective.

  • Meanwhile, although GRPN is down 40% year-to-date to trade at $7.08, option bears have been scooping up calls over puts at an accelerated pace recently. In fact, the equity's 10-day ISE/CBOE/PHLX call/put volume ratio of 5.44 ranks higher than 88% of comparable readings from the past year. With nearly 19% of GRPN's float sold short, a portion of the call buying -- particularly at out-of-the-money strikes -- could be the result of short sellers hedging their bearish bets. Regardless, near-term options on Groupon Inc are attractively priced right now, relatively speaking, as the stock's SVI of 73% ranks in the 35th percentile of its 12-month range.

  • Finally, UNH's 10-day ISE/CBOE/PHLX call/put volume ratio of 8.97 ranks higher than all similar readings taken during the past year, as option traders have been placing bullish bets over bearish at an annual-high pace, ahead of the blue chip's first-quarter earnings report Thursday morning. Luckily, for those looking to pick up short-term bets -- UnitedHealth Group Inc.'s SVI of 22% ranks in the 39th annual percentile, meaning these contracts have remained relatively affordable ahead of the quarterly event. Meanwhile, on the charts, the stock edged higher today thanks to a price target hike to $80 from $75 at Cantor, and now UNH shares are sitting a modest 5.6% higher year-to-date to perch at $79.51.

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Momentum names that made notable moves on Tuesday and could continue to do so into Wednesday's session include solar power concern ReneSola Ltd. (ADR) (NYSE:SOL), construction equipment retailer Titan Machinery Inc. (NASDAQ:TITN), and cargo transporter Eagle Bulk Shipping Inc. (NASDAQ:EGLE). Here is a quick look at these stocks ahead of tomorrow's opening bell.

ReneSola Ltd. (ADR) (NYSE:SOL)

ReneSola was one of many Chinese solar stocks to hit red ink today, as investors continue to express caution toward the sector. To be specific, SOL dropped 6.6% today to close at $2.71, marking a one-month deficit of 28.7%. As such, the stock landed on the short-sale restricted (SSR) list shortly after noon, and despite the limited profit potential on long puts, it appears that one speculator bought to open a mid-sized block at the July 2.50 strike, causing SOL's overall put volume to spike to nearly three times what is typically seen in one session.

Titan Machinery Inc. (NASDAQ:TITN)

After jumping more than 26% over the past three days on a fourth-quarter earnings win, Titan Machinery retreated 6.8% today to close at $18.58. Nevertheless, it seems options traders remain bullish toward TITN. Call volume outpaced the average daily amount by a nearly 6-to-1 margin. The majority of this activity took place in a 1,000-contract sweep at the September 20 strike, where the speculator bought to open the contracts, expecting TITN to head back above the $20 level by the end of summer.

Eagle Bulk Shipping Inc. (NASDAQ:EGLE)

Eagle Bulk Shipping fell another 1.6% today to close at $3.13, and is now sitting 31.8% lower on a five-day basis. Affecting the stock's price action were concerns about restructuring or Chapter 11 on the horizon, as a deadline for EGLE to avoid a debt default expires today. With that being said, EGLE found itself on the hard-to-borrow and SSR lists, and the stock's put volume ramped up to three times the expected daily amount. Furthermore, the security's 30-day at-the-money implied volatility hit a 52-week peak in intraday action, before settling 6.3% lower at 163.2%. Of particular interest were April-dated puts, where it looks like a significant number of long positions were created, despite the limited profit potential.


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Biggest Movers: E-Commerce China Dangdang Inc (ADR), Sears Holdings Corp, and Brink's Company

DANG, SHLD, and BCO are making dramatic movements Tuesday afternoon

by 4/15/2014 2:40 PM
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As we approach the final minutes of the trading day, three of the top movers are Beijing-based e-commerce name E-Commerce China Dangdang Inc (ADR) (NYSE:DANG), venerable retail name Sears Holdings Corp (NASDAQ:SHLD), and security solutions provider Brink's Company (NYSE:BCO). Here's a quick roundup of how this trio of names is faring on the charts this afternoon.

  • Despite any major news drivers, DANG has dropped 8.6% today to $11.28, but is still hovering just above its 120-day moving average. In late February, the equity bounced off of this trendline. The stock has still more than tripled during the last 12 months, however, and the options crowd still remains pretty committed to the bullish cause. During the last 10 trading days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), nearly 17 calls have been purchased to open for each put, resulting in a 10-day call/put volume ratio of 16.99. This ranks higher than 87% of all readings from the past year, indicating a higher-than-usual relative demand for E Commerce China Dangdang Inc (ADR) long call options.

  • On the sunny side of the Street, SHLD has rallied 6% today to $33.62, after last night announcing a new head of its Sears Home Services unit. Year-to-date, SHLD has had a rough go of it, surrendering roughly 15% of its value. Against this backdrop, analysts have been quick to dismiss (in fact, have outright ignored) shares of the retailer. In fact, just one analyst follows the shares, awarding a tepid "hold" rating. What's more, the standing 12-month price target of $20 is well below the stock's current price, and in territory Sears Holdings Corp has not explored in roughly a decade.

  • BCO shares are sitting with an 11.8% deficit in late-afternoon trading. The company reported it would suffer a first-quarter charge after writing off charges related to the devaluation of the Venezuelan bolivar. What's more, Moody's placed Brink's Company shares under review for possible downgrade. Now perched at $25.20, the shares hit a year-to-date low of $24.85 earlier today and are not far from their annual low of $24.07. The stock has recently become a popular choice among short sellers; during the last reporting period, short interest rose by more than 66%, to a total of 4.6 million shares. It would now take more than 11 trading days (at BCO's average daily volume) to cover all of the outstanding bearish bets.


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Earnings on Deck: Google Inc, International Business Machines Corp., and Bank of America Corp

Previewing GOOGL, IBM, and BAC ahead of their upcoming earnings reports

by 4/15/2014 2:29 PM
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It's already been a big week in the earnings confessional, but the fun's not over yet. Still slated to report are search titan Google Inc (NASDAQ:GOOGL), blue-chip tech concern International Business Machines Corp. (NYSE:IBM), and financial firm Bank of America Corp (NYSE:BAC). Here's a quick look at these names as earnings approach.

  • Google Inc (NASDAQ:GOOGL) will unveil its first-quarter earnings after the close tomorrow, and has exceeded analysts' bottom-line estimates in four of the past seven quarters. Wall Street is optimistic when it comes to the stock, as 25 out of 29 analysts offer up "buy" or better ratings, with nary a "sell" in sight. Meanwhile, options traders prefer calls over puts. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.83 indicates that calls outnumber their put rivals among options expiring within three months. Likewise, the security's 10-day call/put volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) rests at 1.45, indicating that traders have bought to open more GOOGL calls than puts during the past two weeks. At last check, the stock has shed 0.9% to flirt with $540.60, as investors digest the company's purchase of Titan Aerospace.

  • International Business Machines Corp. (NYSE:IBM) will also report first-quarter earnings after the close tomorrow. The firm has bested the Street's per-share profit projections in six of the past eight quarters, yet averages a one-week post-earnings deficit of 3.1%. As such, options traders are exercising caution ahead of IBM's next earnings release. The stock's 10-day ISE/CBOE/PHLX put/call volume ratio of 1.66 sits just 6 percentage points from a 52-week peak, suggesting speculators have bought to open puts over calls at a near-annual-high clip during the past two weeks. In the same vein, the security's SOIR of 1.11 stands just 5 percentage points from its own annual acme. Elsewhere, analysts are also wary of IBM, with just four out of 15 doling out "strong buy" endorsements. While IBM has outperformed the broader S&P 500 Index (SPX) by nearly 9 percentage points during the past two months, it's 0.7% lower at $196.34 today, after Citigroup downgraded the shares to "neutral" from "buy" and cut its price target to $200 from $235.

  • Finally, Bank of America Corp (NYSE:BAC) is scheduled to report first-quarter earnings ahead of the bell tomorrow. The company has topped analysts' bottom-line estimates in each of the past three quarters, and advanced 2.3% in the week after its last earnings report. While options buyers have picked up BAC calls over puts at an annual-high clip during the past two weeks on the ISE, CBOE, and PHLX, there's still plenty of room on the bullish bandwagon. Just seven analysts deem BAC worthy of a "buy" or better rating, compared to 12 tepid "holds" and two "strong sells." Plus, the consensus 12-month price target of $17.56 represents expected upside of just 9.1% from the stock's current perch at $16.09. Should Bank of America continue its winning streak in the earnings spotlight, a flood of upgrades and/or price-target boosts could add contrarian fuel to the equity's fire.

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