Why Hasn't VIX Moved? Here's My Response 06-08-2011

Cusick's Corner
The shorts are in control but traders are still preparing for at least one session run up. If the market does muster some sort of upside stance, while I would not be surprised, I would only use this as an opportunity in the short-term to mend long fences or look at some potential fixed-risk bear opportunities. Some might question this view since the VIX has not moved in any way that would flag greater fear in the market. Here's my response -- look at the VIX futures, specifically the September & December VX futures are running at 22 & 23 respectively and the spot VIX is running at 18. This just means that the market is comfortable through June expiration with the action in the market, but there is an expectation of some potential volatility between now and 3rd & 4th quarters. Watch the overnight session; we could see a challenge of lows, 1260s in the June and September S&P. See you Midday

With no economic data to guide the morning action, some of the focus early-Wednesday was on OPEC. The oil cartel couldn't reach an agreement on production quotas and the indecision sent crude oil bubbling $1.88 higher to $100.97 a barrel. Meanwhile, McDonald's (MCD) slipped after the fast food chain's May sales numbers fell short of expectations. Hovnanian (HOV) and Ciena (CIEN) saw post earnings weakness. Later, the Fed's Beige Book offered no relief. In the qualitative assessment of economic conditions, officials noted slowing in consumer spending due to higher gasoline prices and weaker manufacturing because of the Japan crisis. Stock market averages came under pressure shortly after the text was released and the bearish underlying tone continues on Wall Street for another day. At the closing bell, the Dow Jones Industrial Average was down 22 points and has suffered its six consecutive loss. The tech-heavy NASDAQ gave up 26.2 points.

Bullish
Office Depot (ODP) saw a surge of activity today. Shares touched a new 52-week low of $3.35 in morning trading, but rallied 6.6 percent to close the day down just three pennies to $3.57. Meanwhile, in options action, 47,000 calls and 770 puts traded on the office supplies retailer. July 4.5 calls were the most actives. 12,530 changed hands. July 3.5, October 4.5, January 5, and July 4 calls saw interest as well. There were on company-specific headlines to explain the surge in call activity. The company announced the appointment of a new CEO on May 24. The management changes might be fueling some optimism that the worst is over for ODP and investors were buying out-of-the-money calls as shares of the retailer fell to new multi-year lows today.

Bullish trading was also seen in AmBev (ABV), AMD, and Capital One (COF).

Bearish
Molycorp (MCP) was down and options volume was up Wednesday. MCP lost 9.4 percent to $53.21 after the company announced plans for a 10 million common stock offering. 26,000 calls and 23,000 puts traded on the Greenwood Village, CO metals and minerals company. The action was scattered, with Weekly and June puts and calls seeing the most action. For example, the Weekly 55 calls and 50 puts, which are both out-of-the-money and expiring Friday afternoon, were the among the most actives. Some investors were likely taking positions in these short-term contracts in anticipation of additional volatility in MCP before the weekend.

Bearish flow also surfaced in Mens Wearhouse (MW), Ciena (CIEN), and Waste Management (WM).

Index Trading
CBOE Volatility Index (.VIX) gained .72 to 18.79 Wednesday and closed at its best levels since late-March. VIX, which tracks the expected volatility priced into S&P 500 options, is up 21.6 percent month-to-date. The S&P 500 is down in all six trading session so far in June and has given up 4.9 percent during that time. Meanwhile, in the VIX options pit today, 351,000 calls and 72,000 puts traded on the volatility index. July 35 calls were the most actives. 52,474 traded. The contract expires in 41 days and some investors might be taking positions in the deep out-of-the-money call option on concerns about the risk of a substantial spike in market volatility between now and the VIX July expiration.

ETF Action
SPDR Utility ETF (XLU) added 8 cents to $33.16 and one strategist initiated a bearish combination play on the exchange-traded fund. The focus was on the July 32 puts and 33 calls, which both traded 10,600 contracts. In this trade, the investor bought July 32 puts at 35 and 33 cents. They also sold July 33 calls at 48 and 52 cents. At the day, they collected 13 cents and 19 cents on this bearish risk-reversal. Since XLU holds all of the utility names from the S&P 500, the action appears to be a bet that the sector will remain under pressure from now through July. Or, an investor might have initiated the position to hedge or "collar" a portfolio of utility stocks.