JLN Options: Active Central Banks Crush Currency Volatility

Oct 9, 2012

Lead Stories

Active Central Banks Crush Currency Volatility
Matthew Walter, The Wall Street Journal
Currency options prices, a barometer of expected volatility, have plummeted to prefinancial-crisis levels, in response to heavy stimulus measures by central banks around the world.
The potentially unlimited Federal Reserve quantitative easing and European Central Bank bond buying have created a one-way flow in key fixed-income markets, which in turn has made currency trends more predictable and eased volatility. Euro options, for example, are down 66% from their peak in December 2008, according to J.P. Morgan, as a tide of easy money from the world’s top central banks has calmed anxiety in the market. 

Why Has Volatility Declined So Much?
Bob Lang, Benzinga
Volatility is considered a trader’s friend, yet the trend has been pointed down for months.  What’s a trader to do?  Does this mean all is fine in the world, nary a worry?  Hardly so, but the short term unknowns have been revealed and the market is saying ‘rock on’.  All we need to see is the chart to make that determination.

Wall Street flat as caution prevails before earnings
Chuck Mikolajczak, Reuters
U.S. stocks were little changed on Tuesday after a recent rally as investors waited for the start of the U.S. earnings season, which may give direction to the range-bound market.
Repeated warnings about the economy have left investors cautious before what could be a disappointing earnings season, after a rally that has pushed the S&P 500 up nearly 16 percent so far in 2012, driving it to an almost five-year high.

Goldman to Pay $6.75 Million to Settle Options Claims
By Nina Mehta, Bloomberg
Goldman Sachs Group Inc. (GS) agreed to pay $6.75 million to eight U.S. exchanges to settle claims over the way it handled options trades from January 2004 through May 2010, according to a document on the Chicago Board Options Exchange’s website.
The New York-based securities firm mislabeled certain options orders as originating with customers instead of brokers or market makers, potentially giving them access to preferential treatment, according to a letter of consent. Goldman Sachs, which was censured by the exchanges, neither admitted nor denied wrongdoing.

VIX Bets’ Assets Are Less Than Half Their YTD Inflows
Brendan Conway, Barron’s
A handful of volatility-trading products have fallen so hard this year that they’ve burnt through more money than investors hold in them.
Investors — or, more appropriately, traders — have about $1.9 billion invested in the trio of VIX trades known as the Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX), an exchange-traded note that tracks volatility futures, and the leveraged VelocityShares Daily 2x VIX Short Term ETN (TVIX) and ProShares Ultra VIX Short-Term Futures ETF (UVXY). They’ve fed those trading vehicles a net $4.5 billion this year.

The Bernanke Death Blow for Volatility
Resource Investor
Long suffering holders of the volatility ETF (VXX), might be celebrating over the recent price, now trading at $34 compared to $8 the week before. They better take another look.
The beleaguered fund just had a four-to-one reverse split. The price may be four times higher now, but owners now have only one-fourth as many shares. It was the only thing the managers could do to prevent the price from going to zero, where it was surely headed.


Three Executives Said to Leave NYSE’s Liffe Amid Shake-Up
Nandini Sukumar, Bloomberg
Three senior executives at NYSE Euronext’s Liffe derivatives exchange are departing as the company overhauls its operations.
James Brown, head of U.K. business development for the Equity Derivatives and OTC Services division of NYSE Liffe, and account managers Tina Staples and Stuart Lorberg, are leaving the company, according to three people familiar with the situation. James Dunseath, a spokesman for Liffe in London, declined to comment.


Regulation and Hedge Funds
Ricardo Kaulessar, HedgeFund.net
Financial and legal experts gathered at a conference last week to discuss the impact of Dodd-Frank Act and the JOBS Act upon the hedge fund industry.
The law firm of Thompson Hine sponsored the event, held Thursday at Club 101 on Park Avenue in New York.


Increase Odds And Reduce Risk With Vertical Options Spreads
Michael Thomas, Seeking Alpha
Options spreads provide traders with a relatively less risky method of placing bets on equities as opposed to buying those equities outright. It also results in less capital outflow as options require much less upfront cash from the trader to achieve the same gains, and losses. An option allows a trader to control, but not own, 100 shares of the underlying equity at a fraction of the cost to own 100 shares. This article discusses debit vertical spreads that allow directional trades with a defined maximum risk, profit, and timeframe for the trade to be unwound.

A New Way to Look at the VIX
Chad Karnes, ETFguide (via NASDAQ)
“Be fearful when others are greedy and to be greedy only when others are fearful” is a well-known adage attributed to the famed investor, Warren Buffett.  What is interesting about his statement is that up until the 1990’s there was no generally accepted way to measure real “fear” in the markets.  Luckily we now have a few more standard indicators to help with this conundrum.


OIC/IIT Present: The Road to Wall Street, Chicago
Press Release
Back for its third year in a row, IIT – Stuart School of Business and The Options Industry Council (OIC) present The Road to Wall Street: Analyze your Options. Join industry leaders on Friday, November 2nd in a discussion about the state of the global financial environment and what it means to the future of the options industry. Hear recommendations on what skill sets are most in demand in today’s marketplace. OptionsCity CEO Hazem Dawani will serve as key note speaker.
Registration opens at 8:15am. Seminar starts at 9am.

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