Observations & Insight

Toy-pocalypse brings the options volume
Spencer Doar – JLN

The nostalgia kicked in pretty hard this week when Toys R Us filed for Chapter 11 bankruptcy protection. Speculation about Toys R Us’ finances began September 6.

The spillover effects are notable. Mattel (MAT), maker of Barbie and Hot Wheels, Hasbro (HAS), maker of Nerf and G.I. Joe, and Jakk’s Pacific (JAKK) — all top 10 toy companies size-wise — have had their stocks battered as a result. Why? Last year, Toys R Us accounted for 11 percent of Mattel’s sales, 9 percent of Hasbro’s and 9 percent of Jakk’s. Jakk’s is a $3 stock without much options activity, so the focus is on Hasbro and Mattel where the options market exploded.

According to OCC data, 9,004 Hasbro contracts traded and the put/call ratio was 3.56 yesterday. For context, last Monday Hasbro traded 4,668 contracts with a 3.03 p/c ratio, and on September 5 (recall that’s the day before the rumors surfaced) traded 2,842 contracts with a .95 p/c ratio.

Mattel’s activity was even more explosive, though Hasbro is an approximately $95 stock and Mattel is a $15 stock which undoubtedly explains part of the appeal. Yesterday, Mattel traded 45,192 contracts with a 1.45 p/c ratio. Last Monday, 18,840 contracts traded with a p/c ratio of 5.07 and on September 5, a mere 2,070 contracts traded with a 1.13 p/c ratio. Trading some 45k contracts yesterday put Mattel ahead of seven of the 10 select sector SPDR funds (financials, energy and utilities were the ETFs with more volume than MAT).

Of course, Hasbro and Mattel have been on very different tracks of late. Mattel has fallen some 44 percent this year on bad earnings reports and weak sales forecasts. Hasbro on the other hand is up 23 percent this year, even after the recent down move, in part due to savvy licensing deals boosting sales.

In the longterm, Toys R US will probably survive (aka it will live on to deal with the ongoing reckoning that is Amazon). But in the short term, and entering the holiday season, the ripple effects will likely continue to drive market activity.

In case you’re wondering, Toys R Us isn’t a publicly traded stock — though it was for some 25 years before KKR & Co., Bain Capital and Vornado Realty Trust pulled off a leveraged buyout. The big boy in the room, Lego, is also not publicly traded but is having it’s own no-good, very bad month as it announced — after decades of booming sales — that it would cut 1,400 jobs

(Note: The author does not have any positions in the mentioned securities, but does still own some Nerf products, board games, Hot Wheels and action figures.)

 

Lead Stories

Hanweck to Expand Margin Analytics Product Suite, Hires Andrew Brenner as Head of Clearing Globe Newswire
Hanweck, a leading provider of real-time risk analytics on global derivatives markets, today announced plans to build out its margin analytics product offering. Industry veteran Andrew Brenner has joined the firm as Head of Clearing Products and Strategy and will lead the commercialization of Hanweck’s derivatives clearing-related products.
/goo.gl/7ugLPf

Volatility is lurking under the surface of the stock market
Joe Ciolli – Business Insider
Don’t be lulled to sleep by near-record low stock market price swings. Before you know it, shares will be getting whipsawed around, just like the good ol’ days.
At least that’s what official measures of volatility are suggesting.
The CBOE 3-Month Volatility Index, or VXV, is trading close to its highest in five years versus its 30-day counterpart, known as the VIX — the ultra-popular and widely followed instrument frequently referred to as the equity market “fear gauge.”
jlne.ws/2xkqnst

Weakest China Developers Menaced by $38 Billion in Bond Puts
Bloomberg
Chinese property developers face a wall of local bonds that investors can force them to pay off next year ahead of schedule, just as rising interest rates raise the risk that more note holders may opt to do so.
Investors have an option to offload 250 billion yuan ($38 billion) of such notes in 2018, according to Bloomberg data. To put some perspective on that amount, it’s five times all their regularly maturing onshore bond principal this year.
jlne.ws/2xjvicV

****SD: The state of Chinese bond puts first came across my radar at the end of July with the Bloomberg story China Inc.’s Next Debt Headache Is $580 Billion of Put Options Coming Due

Stocks inch up, dollar weakens as Fed focus grows
Caroline Valetkevitch – Reuters
Global stock markets edged higher on Tuesday and the dollar dipped as investors waited for signals from the U.S. Federal Reserve on when it will hike interest rates again and start shrinking its balance sheet.
Wall Street stocks gained slightly, with the Dow climbing to a fresh record after the open, while an index of stocks across the globe also inched higher. Tokyo’s Nikkei .N225 surged 2 percent overnight. Elsewhere, stocks took a breather.
jlne.ws/2xjizXS

****SD: Federal Reserve not only central bank in focus – ECB seen keeping option to prolong bond-buying again in 2018: sources

Options and Futures on the Blockchain Board of Derivatives
Blockchain News
Built on the Ethereum distributed ledger the Dublin-based Blockchain Board of Derivatives (BBOD), designed to be the world’s first, autonomous, on-chain derivatives execution venue, which allows trading cryptocurrency smart derivatives contracts (futures and options) with high liquidity and unprecedented security will open up its token PRE-SALE beginning on September 22th at 8AM GMT.
/goo.gl/fbYCqv

UBS has just made a big algo trading hire from Goldman Sachs
Paul Clarke – efinancialcareers
Investment banks’ electronic trading businesses have turned into a recruitment merry-go-round in the past few weeks, and UBS is the latest bank to capture a major new hire.
Peter Sheridan, the former head of U.S. algorithmic trading, sales and coverage, has just been brought in by UBS to head up its electronic trading distribution team in the Americas.
jlne.ws/2xk3NQM

Exchanges and Clearing

Osaka Exchange: 10th Anniversary Of Equity Index Futures And Options Nighttime Trading
Mondovisione
Osaka Exchange, Inc. (OSE) is celebrating the 10th anniversary of the nighttime trading of equity index futures and options.
/goo.gl/kufzof

Regulation & Enforcement

U.S. has ‘major’ concerns over EU clearing house rule review: CFTC chair
Michelle Price – Reuters
The United States is worried that European regulators may seek direct oversight of U.S.-based clearing houses as part of regulatory changes sparked by Britain’s decision to leave the European Union, a top U.S. regulator said on Monday.
/goo.gl/c6AQMV

CAT Takes Shape
Terry Flanagan – MarketsMedia
For many years, the notion of a consolidated audit trail was just that, a notion — pondered by regulators and discussed at industry conferences, almost as an academic exercise.
/goo.gl/gNqstp

Technology

SimCorp and TradingScreen Form Strategic Front Office Alliance
PRNewswire
SimCorp, a leading provider of investment management solutions and services to the global financial services industry, and TradingScreen Inc. (TS), the leading multi-asset class Execution Management System (EMS) provider, today announce a new strategic alliance. By combining SimCorp and TS’s respective expertise and products in the order and execution management system (OEMS) space, the alliance delivers cross asset coverage to the global buy side, in one seamless and tightly-knit solution for use across the entire investment and trading lifecycle.
jlne.ws/2xkplgb

Strategy

ETF Flopper: Volatility Pulls Back, go With the ‘Mullet Trade’
Crystal Kim – Barron’s
The Dow Jones Industrial Average and the Standard & Poor’s 500 indexes hit new record closes on Monday. The Dow gained 0.28% to 22,331.35, while the S&P notched a 0.15% decline to 2503.87. The CBOE Volatility Index, also known as the VIX, didn’t do much of anything, and at around 10, remains at historic lows.
jlne.ws/2xjGXsm

A Couple of Common Sense Indicators
Bob Lang – CBOE Options Hub
As I have learned and taught about technical analysis over the years, it is certainly not a sophisticated science. If you have a set of eyes, can see recognizable patterns that repeat over and over again we can draw some conclusions, and from that high probabilities of success. There are no guarantees of course, but I’ll take the high odds of human behavior repeating over and over again.
jlne.ws/2xkj9Vd

Is Alibaba’s Jack Ma Better Than Bezos?
Steven M. Sears – Barron’s
An options play for those who missed the rally and those who are nervous about keeping their gains.
jlne.ws/2xj68v4

2 Experts: How To Invest In Emerging Markets At New Highs
Dimitra DeFotis – Barron’s
Implied volatility fell across every major asset class last week, with interest rates and equities in the lead, but emerging markets were no exception.
jlne.ws/2xj5YDV

Investors Can Afford to Take on More Risk
Zachary Karabell – Barron’s
Risk. Mention the word, and many investment professionals pause. Traders, hedge funds, and a few quantitative firms and their algorithms may love risk. But these days, the preponderance of investors, advisors, strategists, and their clients—not to mention the individual investor—see risk as a negative to be avoided. And that is why, dear readers, it may be time to consider adding some to clients’ portfolios.
jlne.ws/2xjReET

The Skew in Potential and Probability for VIX and Volatility
John Kicklighter – DailyFX
There is no theoretical upper bound to equity prices or index levels, but there is a natural low to volatility. The two are distinctly related with an aversion to risk sending shares and their equivalent sinking while activity measures will rise. That inverse correlation holds for the development in sentiment in the opposite direction. In the financial system market today we find benchmarks like the S&P 500 crawl to fresh record highs on a remarkably consistent basis while conviction to this advance steadily deflates and outright skepticism entrenches.
jlne.ws/2xjToEN

Miscellaneous

Bond King Bill Gross Falls to the Middle of the Pack
John Gittelsohn – Bloomberg
Bill Gross once oversaw $2 trillion in assets and was named fixed-income manager of the decade in 2010 by mutual funds researcher Morningstar Inc. A 2004 biography called him “the bond king.” In an era of index investing, he’s one of a handful of mutual fund managers—much less bond fund managers—whose name is known outside Wall Street.
/goo.gl/8jta5p

****SD: From the article – “Gross has generated added return with options strategies, essentially selling other investors insurance against volatility—he thinks they often overpay. But in the second quarter the fund lost money on one of its bets when German government bonds rallied more than he’d anticipated. ‘He sometimes outsmarts himself by being so active on things,’ says Guy Benstead, co-manager of the Cedar Ridge Unconstrained Credit Fund.” And then there’s this tidbit that I’d find hard to cope with – “Pimco’s headquarters rise a block and a half from Gross’s office window, a constant reminder of the past.” Yeesh.

The world’s most influential market figures revealed
Jack Ball – Global Investor Group
Intercontinental Exchange chief Jeffrey Sprecher, NEX boss Michael Spencer and the Hong Kong exchange’s Charles Li are the most influential people in market structure, according to a book that lists for the first time the industry’s 1000 most important figures.
Sprecher, Spencer and Li lead the top ten most influential lists that also includes Margrethe Vestager, the European Commissioner, Howard Lutnick of BGC, Adena Friedman of Nasdaq, Donald Brydon of the London Stock Exchange, Craig Donohue of OCC, Ed Tilly of CBOE and Launch Uggla of IHS Markit.
/goo.gl/Kodvp5

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