Lead Stories S&P 500 ETF dividend play goes badly to the tune of $20M
Reuters (via Financial Post)
A popular options strategy that captures a coming dividend in the SPDR S&P 500 tracking ETF seemed to go badly for some market participants last week, costing them more than $20 million in uncollected dividends, option participants said.
The ex-dividend plays are employed by a small number of traders who buy and sell massive blocks of in-the-money call options just before the “ex dividend” date, the day when investors are required to hold a stock in order to get the dividend.
http://jlne.ws/RQwSK4 Dividend Trades in SPY Yesterday
Gary Katz, ISE’s President and CEO (via email on Friday, Sep. 21)
“We have spoken over the years about the risks posed by the dividend trade strategy and tried to provide transparency to the market by publishing information and statistics about these trades. As evidenced by the significant loss incurred as a result of yesterday’s dividend trades in SPY, this strategy is clearly not risk free. Dividend trades pose an identified, unnecessary risk to the options market, and it is time that the industry takes action to prevent these trades from occurring.”
(via email on Friday, Sep. 21) VIX ETF to Reverse Split After 75% Decline
John Spence, ETF Trends
Barclays plans to reverse split shares of a volatility-linked exchange traded note that has plunged in value this year along with the CBOE Volatility Index while stocks rise to the highest levels since 2007.
The iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) will implement a 1-for-4 reverse split on Oct. 5.
http://jlne.ws/RQzg3u U.S. hedge funds play “catch-up” after missing rally
Edward Krudy, Reuters
Many U.S. hedge funds that have the lagged the stock market rally in 2012 are now buying riskier stocks and commodities – and using more borrowed money – in an effort to play catch-up.
Funds have cut cash holdings and reversed broad bets against the surging market. If the shift in the $2 trillion hedge fund industry continues, it could drive asset prices even higher.
http://jlne.ws/QPDVhk “All quiet on the Western front”
Randy Frederick, Charles Schwab (via email)
After an unpredictable, news-filled last week, it’s “all quiet on the Western front” this time around. That’s the word from Randy Frederick, Managing Director of Active Trading & Derivatives at Charles Schwab. Specific points of interest this week include:
– While Quadruple witching (the simultaneous expiration of equity & index options, security futures, futures and futures options) is no longer as associated with high market volatility as it once was, it was still an unusually flat and quiet week. Even news of a change in the makeup of the Dow Jones Industrial average didn’t light a fire under this docile market. I had been expecting some consolidation and/or profit taking after the recent QE-related gains, and with a total intraday top to bottom range in the SPX of only about 16 points for the week, that is pretty much what we got.
(via email) Big bank derivatives trading drops: report
U.S. bank trading revenue drops 73% from same period 2011: report
Ronald D. Orol, MarketWatch
The amount of notional derivatives held by U.S. institutions fell $5.5 trillion to $222 trillion, according to the report.
In addition, trading revenue at the U.S. institutions was $2 billion, 73% less than the $7.4 billion recorded in the second quarter of 2011.
http://jlne.ws/QPFlIG The HFT challenge to global equity markets
Anthony Harrington, Mindful Money
Two excellent recent commentaries on the High Frequency Trading (HFT) dilemma have shed new light on the problem that is perplexing securities regulators around the world. The fear is that ever faster algorithms and more powerful computers not only will distort, but are already distorting global equity markets.
http://jlne.ws/QzrUfz
EXCHANGES Chicago exchange gets investments from State Street, Fidelity unit
Lynne Marek, Crain’s Chicago Business
Two big-name financial firms have invested in Chicago-based Eris Exchange LLC, created to capture new trading expected under the 2010 Dodd-Frank reform law.
State Street Corp. and Devonshire Investors, the private-equity arm of Fidelity Investments, recently took minority stakes in Eris, a nascent exchange where interest-rate swap futures trade. Those futures were designed to absorb trading that was expected to rise as Dodd-Frank forced private, over-the-counter swaps transactions onto public trading and clearing platforms.
http://jlne.ws/QPF4FE IntercontinentalExchange’s internationalisation push pays off with growth
Shanny Basar, Financial News
Just four years after it was set up it bought the London-based International Petroleum Exchange – now Ice Futures Europe – and on which the Ice Brent Futures oil contract and Gasoil products are listed.
These have helped establish Ice, led by founder Jeff Sprecher as a major player in European energy products.
In the first six months of this year, international revenues accounted for more than half the total income for the first time. Three years ago, these represented a third and are now set to grow further.
Last week Ice announced it had bought a majority stake in Dutch energy APX-Endex.
http://jlne.ws/RQxEGM New FX Trade Repository Launch on Track
Clare Connaghan, The Wall Street Journal
Testing is well under way for a long-awaited repository service that will store trade data for the $4-trillion-a-day global foreign exchange market, says the Depository Trust & Clearing Corporation, which expects to go live with the new system on schedule in December…
By contrast, real-time trade data collected on foreign-exchange options, currency swaps and non-deliverable forwards will immediately be available online through a specially built website, he said.
http://jlne.ws/QzscmT

Strategy

Options Straddles Can Score You Touchdowns Or Get You Sacked
JJ Kinahan, Forbes
A straddle consists of the simultaneous purchase (or sale) of two options of the same strike price in the expiration cycle (Google October 705 straddle pictured below). In order to simplify this discussion, we will keep this to the at the money strikes as when professionals discuss a straddle that is the implied reference unless otherwise noted.
One of the first things to know about a straddle is that they are often used by traders as a thumbnail guide to measure the implied movement expected between the date you are looking at the straddle and the straddle’s expiration date.
http://jlne.ws/RQvbfJ

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