VXX Weekly Options Strategy
Dow 13,000! Markets continue to push higher even in the face of less than encouraging economic reports with the Dow finishing the day just above the psychological 13,000 level and the S&P and Nasdaq reaching multi year highs. The VIX / SPX relationship returned to a sense of normalcy with the ‘fear gauge’ falling 1.2% to 17.98 on the slight market rise.
We’ve been highlighting over the past few days the large contango spread between VIX cash levels and VIX futures and the dilemma it presents to traders looking to glean insight into market direction. Something has to give in the sense that spot VIX is either going to have to come up to meet VIX futures levels or VIX futures will have to fall in value to reflect the much lower volatility environment we’ve been experiencing over the last few weeks. A significant trade trade in VIX options has one trader favoring the latter scenario as he purchased over 11k April 21-18 put spreads, paying $1.15. Maximum profit for this trade is achieved with April VIX futures trading at 18 upon expiration. April VIX futures closed Tuesday at 24.05.
Options Block Events Calendar:
Significant earnings scheduled for Wednesday include: Costco (COST), Joy Global (JOYG), MBIA (MBI) and Finisar (FNSR). Company presentations at the Morgan Stanley TMT and BMO Metals and Mining Conferences continue today. Several significant economic releases scheduled today including: GDP, Chicago PMI, and Fed Beige Book commentary due out at 2:00 pm EST.
Significant Options Research
Reverse Iron Condors on the VXX? Interesting article from Kevin O’Brien at Seeking Alpha suggesting an effective strategy for generating weekly options income from the VXX. Based on actual trades from the start of 2011 up until last week, O’Brien recommends trading reverse iron condors on VXX weekly options to extract weekly gains from VXX volatility. The reverse iron condor structure consists of purchasing a bull call spread and a bear put spread on the VXX with the same expiry. For example on February 9th O’Brien purchased the Feb 25/26/24/23 reverse iron condor (25-26 bull spread + 23-24 bear put spread) for $0.68. With the VXX trading at 24.50, shares of the VXX needed to finish above $25.68 (+5%) or below $23.32 (-5%) upon expiration to generate a profit. The VXX finished the following week at $26.60, resulting in a 47% return. O’Brien reveals detailed results of this weekly strategy dating back to January of 2011 with the overwhelming majority of the trades finishing in positive territory. You can check out the results HERE. Just as a reminder, upon inception a reverse iron condor is typically delta neutral, long gamma, long vega, and short theta.
Protection Buying Emerging in the Tech Space: TradeMonster spotted some interesting options activity in the Technology sector late yesterday afternoon. One significant trade that crossed the screens was the purchase of 20k April 28 puts vs. the sale of 20k April 27 & 26 puts in the XLK, the SPDR Technology Fund ETF. Maximum profit for this bearish position occurs with the XLK trading at $27 (down 7% from yesterday’s close) upon expiration.
Video of the Day: Demystifying The VIX – Part 1
In part 1 of this 5-part series, the CBOE provides a video primer on all things VIX. Everything you ever wanted to know about the ‘fear gauge’ is likely included within this series so check it out to brush up on your volatility trading knowledge.
Source: CBOE
Unusual Options Activity
Courtesy of WhatsTrading.com
Banco Santander (STD) is up a penny to $8.40 and morning trades on the Spanish bank include a multi-exchange sweep of 4,045 Mar 9 calls for 10 cents when the market was 5 to 10 cents. 4,574 now traded against 8,138 in open interest and possibly bullish trading ahead of EU’s second LTRO program tomorrow. The question seems to be the size of the LTRO. At the first refinancing operation in December, European banks borrowed up to 489 billion euros. Banks might ask for more this time, which could potentially give the market more liquidity. If demand for loans is significantly less than in December, perhaps European banking problems are not as bad as feared. In any event, European equity markets and banks, including STD, could potentially see volatility tomorrow as events unfold.
Micron (MU) with relative strength and high options volume today after the company agreed to expand a NAND Flash Memory joint venture with Intel. Micron shares are up 40 cents to $8.96 Tuesday and at multi-month highs after a three-day 14.7 percent winning run higher. 32.4 million Micron shares traded, which is more than 3X the typical volume. Meanwhile, 40,000 calls and 9,600 puts traded on the chipmaker. The flow is scattered, with Mar 10, Jan 12.5 and Mar 9 calls at the top of the most actives. Levels of implied volatility in MU are moving up 5 percent to 49.5, as upside call buyers seem to be dominating the flow and looking for further gains in Micron in the weeks/months ahead. Earnings will come into play around Mar 21.
Nokia (NOK) loses 8 cents to $5.36 and some investors are dialing in to Mar 6 calls on the stock today. Most of the volume is due to one multi-exchange sweep of 4160 contracts for 11 cents each, which is an opening buyer, according to ISEE data. 5,465 now traded. Meanwhile, 1000-lots of Apr and Jul 1 puts on NOK traded below the bid today. Overall, the flow looks bullish and comes despite a downgrade at Oppenheimer — to Underperform from Perform. Shares fell 6.2 percent yesterday, as investors showed little enthusiasm towards the company’s latest round of smartphones unveiled at an event in Barcelona.
Courtesy of Interactive Brokers
Staples (SPLS) is scheduled to reveal its fourth-quarter performance before U.S. markets open on Wednesday, and it looks like options traders are positioning for the upward move in the shares to continue. Front month calls are most active at the Mar. $16 strike, where it appears 2,400 contracts were purchased for an average premium of $0.44 each. Fresh interest in the April $17 strike calls was largely generated by buyers snapping up some 920 contracts at a premium of $0.25 apiece.
Bullish activity in Gilead (GILD) options jumped and shares moved up more than 2.0% to $46.18 the same day the drug maker presented at the 2012 RBC Capital Markets’ Healthcare Conference in New York. Positive comments from management along with the impending April 19th first-quarter earnings report from the Company could be catalysts for the sizable bull call spreads accumulating in the April expiry. It looks like one investor purchased a roughly 15,000-lot April $47/$50 call spread for a net premium of $1.13 per contract to position for shares to extend gains during the next couple of months.
