Observations & Insight

Options Miscellany

From Henry Schwartz on LinkedIn : “Volatility = Opportunity for options liquidity providers after a tough 2017. Market-wide theoretical ‘edge’ on Tuesday was over $550M, including $265M in the index products, nearly 10x the typical daily edge seen in 2017 based on Trade Alert LLC data and FT Options values.”

After the bloodbath in inverse VIX ETPs,a number of stories in today’s newsletter focus on the big winners from the spike in volatility.

Lead Stories

Speculators in biggest ever U-turn on low volatility bets
Jamie McGeever – Reuters
The wild gyrations rocking global markets this month have sparked the biggest ever reversal of speculators’ bets on low volatility.
For investors, this could be a game-changer. As Citi strategists told clients on Monday, “Time is Up for Goldilocks”.
The suddenness and severity of the position shift suggests 2018 will be very different to 2017. Structurally higher volatility will make for a much less equity-friendly environment.

****SD: WSJ here and Bloomberg here. Maybe speculators saw all the stories below about outsized returns? Just waking up to tail risk?

Texas hedge fund Artemis plucks millions from investments designed to benefit from turmoil and volatility
Rupert Neate – The Guardian
Stock markets gyrated wildly this week, and a lot of people lost a lot of money. But Chris Cole, a 38-year-old hedge fund manager from Texas, wasn’t one of them. He made millions from his fund’s bet on a financial apocalypse.
From his office overlooking the Colorado river in Austin, Texas, Cole runs Artemis Capital, a hedge fund that, since 2012, has been betting on a repeat of the 1987 Black Monday stock market crash.

****SD: Given the whole point of the fund and the tone of its research notes and market outlooks for the past handful of years, if Artemis had not made a killing I would have been very, very confused. Also making a killing on volatility in Austin? Houndstooth Capital.

’50 Cent’ VIX Trade Just Paid Off to the Tune of $200 Million
Luke Kawa – Bloomberg
Hate it or love it, the underdog’s on top: patiently waiting for the VIX to explode has finally been rewarded in a big way.
Among the biggest winners from last week’s turmoil is the mysterious buyer of out-of-the-money options tied to the Cboe Volatility Index priced at about 50 cents apiece.

Quants Warn of ‘Nasty Accidents’
Joe McGath – Institutional Investor
Five categories of global hedge funds have become highly correlated to just four major macro-economic themes, researchers claim.
A quantitative analysis of positions held by risk parity, absolute return, emerging markets, macro CTA and equity long/short funds, conducted by Quant Insight, found four major macro themes playing across all strategies.

****SD: Depending on your outlook, this title could be “Quants Cause Nasty Accidents.”

This Tiny Hedge Fund Just Made 8,600% On a Vix Bet
Dani Burger – Bloomberg
Denver traders pocketed $17.5 million on $200,000 VIX wager; People laughed when the firm bought disaster protection in XIV

****SD: Is there a better marketing strategy

Oil prices tumble as hedge funds liquidate record bullish position
John Kemp – Reuters
Hedge funds have started to liquidate some of their record bullish positions in crude oil and refined fuels as the rally has gone into reverse and amid signs that U.S. shale production is surging.

Weekend Review of VIX Options and Futures Feb 10 2018
Russell Rhoads – Cboe
For the past few months writing this weekend review has been a difficult task. How many different ways can I say VIX is low and reflecting low realized volatility in the S&P 500? The past couple of weeks it has suddenly gotten much easier to talk about VIX.
Last week was the first one week drop of greater than 5% since early January 2016. The weakness actually began two weeks ago and the S&P 500 has given up 8.8% in the past two weeks is the biggest two week drop since August 2011. The result is VIX doing what it does in times of uncertainty, move up and move up quickly.

****JB: See also, Weekend Review of Volatility Indexes and ETPs Feb 10 2018 and Weekend Review of Russell 2000 Options and Volatility Feb 10 2018

Exchanges and Clearing

Booming Demand for Clearing Options, Futures Contracts Fuels OCC’s Growth
Heather Noel – DallasInnovates.com
As the Dow plummeted this week, trade volumes experienced a sharp rise. The jump in activity has brought record-setting days for The Options Clearing Corporation, which operates using a decentralized structure with equally-capable offices in Dallas and Chicago.

High-Speed Traders Profit From Return of Loophole at CME; Tiny gap between private trade confirmations and public data feed can be exploited to detect market moves, critics say
Alexander Osipovich – WSJ
Five years ago, the world’s largest exchange operator vowed to fix a flaw in its systems that allowed high-speed traders to infer the direction of the futures market a fraction of a second before everyone else.

Cboe Global Markets Reports Week of Record Trading Activity
Several single-day records set across Cboe Global Markets exchanges and products between February 2 and February 8, 2018; VIX options and futures volume reach new all-time highs; Cboe Options, C2 Options, CFE and Cboe EDGX Options exchanges experience consecutive busiest days of all time on Friday, Monday and Tuesday

MSCI offering expanded to include exposure to Korea
January saw Eurex MSCI products get off to a great start in 2018. Due to the advancing roll period, open interest in many established products and several new ones have gained traction, most notably in the MSCI U.S. products.
Open interest across all MSCI Futures and Options has grown by almost 10 percent since December 2017 – which is a significant development given that the latter was a record month for us.

SGX flagship futures in doubt after Indian exchange market data suspension; India’s largest exchange operators will stop licensing index market to foreign exchanges as derivatives volumes migrate from the country.
Hayley McDowell – The Trade
Three major Indian exchanges have said they will stop licensing their market data and indices to foreign investors, bringing the Singapore Exchange’s (SGX) flagship futures index into question.

****SD: FIA has serious concerns about the termination of market data suspension. The reach of this development is far and wide. Reuters has Dubai exchange explores options as Indians stop licensing securities abroad

Cboe Global Markets Awarded Most Innovative Exchange Technology at 2018 Fund Technology and WSL Awards
Cboe Global Markets, Inc. (Cboe: CBOE | Nasdaq: CBOE), one of the world’s largest exchange holding companies, announced today the company was awarded “Most Innovative Exchange Technology” at the 2018 Fund Technology and WSL Awards in New York City on Wednesday night.


Rob Daly – Markets Media
Thesys CAT LLC, the Thesys Technologies subsidiary operating as the Plan Processor for the Consolidated Audit Trail, appointed Vas Rajan as its Chief Information Security Officer (CISO).

Regulation & Enforcement

British watchdog tells algorithmic traders to tighten controls
Huw Jones – Reuters
Some firms using computers to trade at ultra-fast speeds are not applying safeguards required to avert market meltdowns, Britain’s Financial Conduct Authority (FCA) said on Monday.

Fidelity is trying to save investors from blowing up their accounts
Evelyn Cheng – CNBC
Retail brokerage Fidelity said Friday it has temporarily blocked customers from buying some volatility-related products that caught hedge funds and individual investors on the wrong foot this week.

Cboe seeks dismissal of Exceed Holdings’ trade secrets case
Maria Nikolova – FinanceFeeds
Chicago Board Options Exchange (CBOE), now known as Cboe Options Exchange (Cboe), a part of Cboe Global Markets Inc (NASDAQ:CBOE), is seeking to refute accusations made by Exceed Holdings LLC dba Exceed Investments LLC about trade secrets misappropriation.


Data overload: commodity hedge funds close as computers dominate
Eric Onstad – Reuters
“Chocfinger” made his name and his money by taking bold bets on cocoa markets. But after nearly four decades of trading, sometimes winning, sometimes losing, Anthony Ward threw in the towel.

A culprit for financial site glitches: you and your apps
Ross Kerber – Reuters
Jittery investors and their smartphones stressed out leading U.S. online financial sites last week as heavy volatility shook markets, technology analysts said.


Short Vol Trade Lives! ETF at Heart of Turmoil Lures Record Cash
Rachel Evans – Bloomberg
You just can’t keep a good trade down.
The ProShares Short VIX Short-Term Futures fund, which lost more than 80 percent of its value on Feb. 6, took in the most cash on record last week. The product, which goes by the ticker SVXY, was the fifth-most popular exchange-traded fund in the U.S., absorbing more than $500 million, data compiled by Bloomberg show. That made it more attractive than small caps, utilities or even Treasuries.

VIX Blowup a Brutal Lesson That Payoff Matters, Not Forecasts
Tanvir Sandhu – Bloomberg
Volatility is back, for now.
The blowup in short-volatility related VIX exchange-traded products is a lesson that what matters is the payoff, not forecasting. Ignoring negative convexity, the tendency for volatility to outpace the relative decline in equities, can be destructive.

Time To Short The VIX?
Rahul Salgia – Seeking Alpha
There is so much fear in shorting the VIX as it suddenly spiked 100% last week. However, it may now be the time to short the VIX.
Sophisticated traders believe that shorting the VIX is a win-win trade as volatility is mean reverting. Over the past eight years, institutions made a killing over this trade. This week was different as volatility spiked over 100% to 37 on Monday. Funds and retailers panicked as they sold too much premium. They had to hedge their short volatility bet, which caused stocks to aggressively plummet. In addition, a few popular volatility products are going to be delisted in the coming weeks.


Why Paul Milgrom Is an Economist You Should Know
Evan Peterson – CME Group OpenMarkets
Paul Milgrom’s work in economics has made him a giant in the field. He’s developed world-changing ideas on game theory, auction theory and market design at places like Northwestern, Yale and Stanford. But when he graduated from the University of Michigan in 1970, he didn’t enter a PhD track, and had no plans to.

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