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Buying and holding volatility a 2018 winner; New Fed Landscape w/ Powell at Mic Every Meeting

Dec 28, 2018

Observations & Insight

The Spread – Vol Strikes Back: Top Stories of 2018
Did it feel like 2018 was a whirlwind? Did it just whiz by? If so, here’s a brief recap of the year’s big options stories.
Watch the video here »


Editor’s Note
Spencer Doar – JLN
This is the last JLN Options Newsletter of 2018. Our first newsletter of 2019 will be published on January 2. Have a safe and happy New Year’s Eve! See you on the other side.

Lead Stories

Buying and holding volatility usually hurts; then came 2018
Saqib Iqbal Ahmed – Reuters
The big uptick in stock market gyrations this year has made a surprise winner out of a trade that has rarely delivered a win – buying and holding volatility.
Stock market ructions over the last decade have been few and fleeting, requiring great feats of timing to generate profits from volatility buying. Not so this year.

Traders Face New Landscape With Powell at Microphone After Every Fed Meeting
Elizabeth Stanton – Bloomberg (SUBSCRIPTION)
As Fed chair speaks after each meeting, hedging may shift; But quarterly forecast schedule seen keeping repricing minimal
U.S. rates traders are gearing up for a new landscape in 2019, when Federal Reserve Chairman Jerome Powell plans to start holding press conferences after all eight of the central bank’s meetings. Some shift in hedging activity in the options market is expected. Traders will have to prepare for the increased risk of a policy change at the four gatherings where the Fed chief previously didn’t take questions — or at least for potentially market-moving comments.

****SD: From Bloomberg – Powell Has a Lot to Lose, Little to Gain in Trump Sit-Down

Behind the Market Swoon: The Herdlike Behavior of Computerized Trading
Gregory Zuckerman, Rachael Levy, Nick Timiraos and Gunjan Banerji – WSJ (SUBSCRIPTION)
Behind the broad, swift market slide of 2018 is an underlying new reality: Roughly 85% of all trading is on autopilotócontrolled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast. That market has grown up during the long bull run, and hasn’t until now been seriously tested by a prolonged downturn. Since peaking in late September, the S&P 500 index of U.S. stocks has fallen 19.8%. The S&P is down 15% in December alone. It isn’t just stocks. Crude oil stood above $75 a barrel in October. By Christmas Eve it was below $43. Monday was the worst Christmas Eve for the Dow Jones Industrial Average in its history.

With the VIX Spiking, It’s Time to Revive the Chaos Trade
Steven M. Sears – Barron’s
While the best investing strategy for these unusual times might be constantly watching cable-TV news to anticipate President Donald Trump’s tweets, it seems more broadly effective to use an out-of-favor strategy: buying upside VIX calls. We know that concerns remain about the integrity of Cboe Volatility Index, or VIX, options and futures trading since February, when VIX spiked 115% in a day. But VIX options offer a relatively inexpensive way to trade an erratic stock market.

****SD: He’s back!

Cboe’s All-Options Put/Call Ratio Hits 1.82, Its Highest Level in More Than 23 Years
Matt Moran – Cboe Blog
On December 20, Cboe’s daily Put-Call Ratio for its entire options volume rose to 1.82, reaching its highest level in more than 23 years. Analysts and investors often follow and cite put/call ratios in conjunction with attempts to gain insights on possible changes in investors’ bullish or bearish sentiments. Recent news stories in Barron’s and in Bloomberg have highlighted comments on the possible impact of high put/call ratios.

‘Completely Bizarre’ Stock Moves Leave Traders Scratching Heads
Abhishek Vishnoi, Min Jeong Lee and Matthew Burgess – Bloomberg (SUBSCRIPTION)
Explaining moves is ‘exercise in futility,’ investor says; Some Asia traders decide to stay out of the stock market
As a turbulent December in equity markets draws to a close, there’s one idea traders and investors can agree on: these are not usual times, especially for this time of year.

This stock-market volatility gauge is about to do something it hasn’t done since 2011
William Watts – MarketWatch
It shouldn’t come as a surprise to anyone paying attention that stock-market volatility is on the rise. But here’s a statistic that underlines the phenomenon. The Cboe Volatility Index, commonly known as the VIX and often, if not sometimes derisively, referred to as Wall Street’s fear gauge, was on track Thursday to close above 30 for the fourth day in a row. The index, an options-based measure of expected volatility over the coming 30-day period, traded at 32.92 in recent action, up 2.51 points.

Markets Brace for 2019 Volatility
Bloomberg (VIDEO)
Bloomberg’s Peter Coy and Peggy Collins discuss 2018 market volatility and the economic outlook going forward with Alix Steel on ‘Bloomberg Daybreak Americas.’

Investors must realise that 2018 was no aberration; The level of uncertainty facing investors in the new year is particularly acute
Nikhil Srinivasan – Financial Times (SUBSCRIPTION)
Being wrong does not appear to be a restraint for those making market predictions. The S&P 500 is down 7.7 per cent for the year while the 10-year US Treasury yield isn’t that far from where it began the year. That is quite the opposite of what was being forecast.

Exchanges and Clearing

NOM Introduces Enhancement to Order Price Protection
Beginning Monday, January 7, 2019, The Nasdaq Options Market (“NOM”) will introduce an enhancement to its Order Price Protection (“OPP”) feature.

Euronext raises stake in Oslo B¯rs VPS to support full acquisition offer; Euronext increases stake in Norwegian stock exchange to support considered EUR625 acquisition bid.
John Brazier – The Trade
Euronext has increased its stake in Norwegian stock exchange and national CSD operator, Oslo B¯rs VPS, from 49.6% to 50.6%.

Regulation & Enforcement

U.S. regulator SEC to operate on partial basis due to federal shutdown
Katanga Johnson – Reuters
The U.S. Securities and Exchange Commission (SEC) announced on Thursday that it will partially operate with reduced staff during to the ongoing federal shutdown.

U.K. Investigates Leaks in Insider Trading Probe; Britain’s top law-enforcement body examining allegations that translator was paid to tip off target of investigation
The U.K.’s top law-enforcement body is examining allegations that an employee leaked information to a suspect in exchange for money, undermining a probe into a suspected network of European insider traders, according to people familiar with the matter.


Congress meets briefly, takes no steps to end shutdown
Both chambers of the U.S. Congress convened for only a few minutes late on Thursday, but took no steps to end a partial federal government shutdown before adjourning until next week.

Option trading lessons from the man who sold his trading system to JPMorgan
Kolkata – Many envy a person who takes five holidays a year, but few would put in laborious efforts needed to ensure well-timed and worry-free breaks. Quantitative derivatives trader Subhadip Nandy is one such person to be jealous of. The Kolkata-based options trader quit a comfortable job in Life Insurance Corporation to dabble in the markets in the 90s. At the turn of the century he doesn’t have to look back, for the markets give him relief ó mentally and monetarily.

The volatility in stocks right now is ‘abnormal,’ says manager of $200 billion pension fund
Fred Imbert – CNBC
Investors should be careful as the recent spike in market volatility is far from normal, according to the manager of the California State Teachers’ Retirement System, which has more than $200 billion in assets.

John Lothian Newsletter

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