AQR Quants Say Volatility Bets Can Lose Even If They’re Right

Sep 24, 2018

Observations & Insight

The Spread – Record Highs – 9/21

JohnLothianNews.com

To put it bluntly, action in marijuana stocks this week was nuts.

Watch the video and see the stories referenced here »

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Trump to meet with Rod Rosenstein Thursday after conflicting reports about deputy attorney general’s departure
Dan Mangan, Jacob Pramuk and Kevin Breuninger – CNBC
President Donald Trump will meet with Deputy Attorney General Rod Rosenstein on Thursday amid swirling reports that the No. 2 Justice Department official’s departure is imminent.
/cnb.cx/2MXmMFn

***SD: Very confusing. All I know with confidence is that it is a rainy day in D.C.

Lead Stories

AQR Quants Say Volatility Bets Can Lose Even If They’re Right
Yakob Peterseil – BloombergQuint
Option wagers on higher volatility profit just 20% of the time; ‘Healthy skepticism’ needed for those who claim success: paper
Punting on an outbreak of volatility is a mug’s game, even at the best of times.
A new paper this month from two executives at AQR Capital Management delivers a sobering conclusion: Buying options to profit from a surge in equity-price swings is typically a losing proposition, even if volatility jumps.
/goo.gl/aZ7poi

****SD: You mean to tell me I should be skeptical of unconfirmed claims regarding profits?! Who’d a thunk… Other AQR content regarding volatility: Understanding the Volatility Risk Premium from May 2018 and Please Stop Talking About the VIX So Much from July 2017.

Lonely, and Costly, Times for Hedge Funds That Bet on Collapse
Laurence Fletcher – WSJ
Nearly a decade into what feels like a never-ending bull market, it is getting awfully lonely for a group of maverick hedge funds betting on what they think will be a coming financial meltdown.
“If my analysis is right, we’re past the point of no return,” said Francesco Filia, founder of $500 million London-based Fasanara Capital, who has pivoted his $100 million macro fund to bet on a market crash. “Nothing else will do than having cash or shorts,” he said.
/on.wsj.com/2xIeTin

****SD: They aren’t alone in losing, though.

Volume spikes on sector reshuffle, quadruple witching
Chuck Mikolajczak, Caroline Valetkevitch – Reuters
An overhaul of Wall Street’s technology and media sectors coincided with the quarterly expiration of futures and options, bringing a burst of volume to trading late on Friday that could continue in the days that follow.
/reut.rs/2xAJEFy

****SD: We are heading into the most historically volatile month of the year – the link is to a Steve Sears article from last week breaking down a Goldman study about seasonal volatility.

Sharpening the Axe: Three Crucial Steps Broker-Dealers Should Take Now to Prepare for 2019 CAT Industry Testing
David Campbell – Traders News
Given the enormous complexity of rewriting how the U.S. equities and options markets will report trade- and order-related events to the Consolidated Audit Trail (CAT), the latest proposal of a phased implementation approach is a welcome change for broker-dealers. Under the new Master Plan, the U.S. cash equities markets can expect to start industry testing order events in August 2019.This will give industry members more time to increase their capability to implement CAT while reducing risk for all stakeholders throughout the process, particularly with the implementation of new requirements such as options reporting.
bit.ly/2xDjVMM

Oil Traders Suffering Dismal Year as Easy Money Deals Vanish
Andy Hoffman, Laura Hurst and Catherine Ngai – BloombergQuint
Some of the largest trading firms are restructuring operations; Top executives expect wave of consolidation amid lower profits
After years of easy money, many of the world’s biggest oil traders are enduring a brutal new reality.Traders have been wrong-footed by wild swings in price spreads between oil grades, particularly in the U.S. market. Amid dwindling profits, trading desks are being overhauled, with some firms restructuring their operations and paring budgets designed for better times.
/goo.gl/XouW8P

****SD: Also from BloombergQuint – Major Traders Are Talking About $100 Oil Again

Bad Calls Hurt Junk Borrowers In a Once-Hot Emerging Market
Manju Dalal and Saumya Vaishampayan – WSJ (SUBSCRIPTION)
Indonesian companies are struggling with a weak currency and poorly hedged dollar debts—hurting investors in Southeast Asia’s largest economy, which was until recently a hot destination for emerging markets specialists.
The strain is another illustration of how a stronger dollar and higher U.S. borrowing costs are hitting poorer nations. The moves have boosted the appeal of relatively safe U.S. assets, threatening what had been a reliable source of funding for countries like South Africa and Argentina.
/on.wsj.com/2xBPpmz

****SD: From the article: “Indonesia’s central bank has required most companies to hedge some currency exposure since 2015, after an earlier bout of rapid depreciation. However, many firms economize by using a combination of options.”

Exchanges and Clearing

Cboe Europe Plans to Launch Equities Trading in Three New Markets
Cboe
Cboe Europe, the region’s largest equities exchange operator, today announced it will expand its coverage to 18 markets across Europe with the planned launch of trading in Polish, Hungarian and Czech securities beginning 5th November 2018, pending regulatory review.
/goo.gl/PcQFEu

****SD: Not options but indicative of Cboe’s growth desires.

Moves

There’s been a rush of exits from Goldman Sachs’ NY electronic trading team
Sarah Butcher – eFinancialCareers
In theory, Goldman Sachs is building out its electronic trading business. Incoming CEO David Solomon said in June that the firm is moving away from its “cash business, flow business and electronic platforms” as it pursues $1.5bn in extra fixed income trading revenues and $0.5bn in extra equities trading revenues. In reality, a surprising number of people seem to been quitting Goldman’s electronic trading platform for rivals, particularly in New York.
bit.ly/2xBL9TX

Regulation & Enforcement

Action Jackson!
Themis Trading Blog
This morning we were going to share a first-account-trading-war-story that perfectly captures the absurdity created in our markets from payment for order flow, and specifically stock exchange rebates. However, a jaw-dropping speech from one of our new SEC Commissioners, Robert Jackson, presented itself as a perfect stage-setting opportunity. This morning we highlight that speech instead, and next week we will share our war story.
bit.ly/2xBecau

Strategy

Stock-market landscape looks like it did before correction, but don’t go short, say Jefferies analysts
William Watts – MarketWatch
The Dow Jones Industrial Average last week returned to record territory for the first time since late January, vindicating bulls but also stirring memories of the February plunge that knocked the blue-chip average and the S&P 500 into correction territory.
Indeed, Jefferies analysts led by Sean Darby, chief global equity strategist, write in a Monday note that the current landscape is “similar to the February correction but with some redeeming features.” And those redeeming features, they said, are reason enough not to short the market.
So what looks familiar?
/on.mktw.net/2xyTVT0

Hedge funds bet on shortage of Brent oil
John Kemp – Reuters
Hedge fund managers made only minor adjustments to their overall position in petroleum futures and options in the latest week but continued their rotation out of West Texas Intermediate into Brent.
Hedge funds and other money managers raised their combined net long position in the six most important petroleum contracts by just 3 million barrels to 1.049 billion barrels.
/reut.rs/2xASnrv

Miscellaneous

CME Group to Launch Physical WTI Houston Crude Oil Futures Contract
CME Group
Suppliers, refiners and end users of U.S. crude oil will have a new way to price and hedge WTI light sweet crude oil in Houston beginning in Q4 2018. CME Group, the world’s leading and most diverse derivatives marketplace, will offer a new WTI Houston Crude Oil futures contract with three physical delivery locations on the Enterprise Houston system, pending regulatory review. WTI Houston Crude Oil futures will be listed with and subject to the rules of NYMEX, beginning with the January 2019 contract month.
bit.ly/2xznKCy

****SD: Also from CME – Houston, We Have a Solution

Bitcoin prices may not have hit rock bottom yet, says Cboe options expert
Aaron Hankin – MarketWatch
Coming off the best week for digital currencies since late July, bitcoin, the world’s No. 1 digital currency, was trading marginally lower on Monday.
In early action, a single bitcoin was changing hands at $6,588.19, down 1.3% since Sunday at 5 p.m. Eastern Time on the Kraken exchange, and off a late-Friday high of $6,808.
/on.mktw.net/2xDfIss

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