Alarm Bells Ringing in Options Market Point to Volatility Ahead
Cormac Mullen – Bloomberg
Alarm bells are ringing in the U.S. equity-options market, and to Sundial Capital Research Inc. that points to one thing: a spike in volatility ahead.
Extreme readings in indicators such as the cost of S&P 500 Index hedges, short-volatility positioning and U.S. equity put-call ratios all suggest investor complacency is at exaggerated levels. The Cboe Volatility Index — or VIX — has fallen almost 40% from its October high as equities rallied to fresh peaks on a surge in optimism over a potential U.S.-China trade deal.
Money Stuff: You Can’t Just Call Loans Options
Matt Levine – Bloomberg
A pretty ordinary way for a hedge fund to invest is that it borrows money from a bank and uses that money, along with the fund’s own equity, to buy stuff. If the stuff goes up the hedge fund pays back the bank’s loan and keeps the profits. If the stuff loses value the hedge fund takes the loss, reducing its equity. If the stuff loses a lot of value then the equity will reach zero, the loan won’t get paid back, and the bank will eat the rest of the loss. If the fund puts up $20 and borrows $80 from the bank, it can buy $100 worth of stuff. If that stuff ends up being worth $120, the hedge fund doubles its money to $40 (ignoring interest on the loan); if it ends up being worth $90 the hedge fund only gets back $10 of its original $20; if it ends up being worth $50 then the hedge fund loses its $20 and the bank loses $30.
This has, roughly speaking, the profile of a call option: If the stuff is worth more than the amount of the bank’s loan, the hedge fund has all the upside; if it’s worth less, the hedge fund’s downside is floored at the amount of equity it put up.
Options Traders Resist Growing ETF, Index Influence
Russell Rhoads – TABB Forum
A strong third quarter for options trading saw single-stock options continue to wrestle a growing share of total volume away from the ETF and index options markets, reversing in 2019 a trend that had been in place for several years. TABB Group head of derivatives research Russell Rhoads looks at the numbers.
Exchanges and Clearing
CME Group Announces Resignation of Alex J. Pollock from Its Board of Directors to Accept Senior Position with the U.S. Treasury
CME Group (press release)
CME Group today announced that Alex J. Pollock will step down from the company’s Board of Directors effective November 15 as he accepts a new role within the U.S. Treasury Department as Principal Deputy Director of the Office of Financial Research. Pollock has served as a CME Group director since 2004. “We sincerely thank Alex for more than 15 years of leadership on the CME Group Board,” said CME Group Chairman and Chief Executive Officer Terry Duffy. “He has made many contributions and was instrumental in helping our institution manage through significant market events and with its ongoing organizational development. While we are sorry to see him leave the Board, we wish him well in his new position with Treasury.”
Regulation & Enforcement
Libor’s Demise Will Upend How Hugely Popular Derivatives Work
Elizabeth Stanton – Bloomberg
CME Group Inc. shed light on what could happen to the exchange giant’s most-traded contracts — eurodollars, which permit bets on interest rates — if the scandal-plagued Libor benchmark they’re tied to goes away in two years.
Officials at CME on Tuesday proposed a methodology for converting eurodollar futures and options to other derivatives at the exchange, ones linked to an alternative benchmark called the Secured Overnight Financing Rate, or SOFR. The plan could be tweaked based on customer feedback.
Do NOT show these ominous charts to stock-market bulls, says strategist who sees a correction forming
Shawn Langlois – MarketWatch
He’s not exactly a doom-and-gloomer, but Lance Roberts, chief strategist at RIA Advisors and author of the Real Investment Advice blog, just placed bets against the S&P 500 in all his portfolios to guard against a looming downturn.
“Given the fact that the short, intermediate, and long-term indicators have all aligned, the risk of running portfolios without a hedge is no longer optimal,” Roberts wrote in a blog post on Tuesday. “My job, like every portfolio manager, is to participate when markets are rising. However, it is also my job to keep a measured approach to capital preservation.”
Tencent Traders Prep for Biggest Post-Results Move in 15 Months
Elena Popina – Bloomberg
Tencent Holdings Ltd. traders are preparing for the stock’s biggest post-earnings reaction in more than a year.
The options market is pricing in a 2.9% move either way Thursday in the most valuable Asia-listed company, data compiled by Bloomberg show. Shares of the Chinese Internet giant, which releases third-quarter results after Wednesday’s close of trading, haven’t moved more than 2% on a post-earnings day since August 2018. They closed 0.9% lower Wednesday.
Inside Volatility Trading: November 12, 2019
Kevin Davitt – Cboe blog
From a capital markets “meta” standpoint, volatility just is. Volatility is a nondirectional, statistical measure of the dispersion of returns for a given security or index. It’s neither good nor bad. From an interpersonal and psychological standpoint, volatility typically connotes something very different than a rote calculation. Few people wake up looking forward to “volatility” in their day-to-day lives, but uncertainty is a constant whether you invest or not. Volatility just is.
Ask a Trader: When High Volatility Hits, Should I Switch from Long to Short Options Strategies?
Cameron May – The Ticker Tape
Any veteran option trader will tell you that part of the allure of options strategies is their versatility and flexibility. Bullish and bearish, long-dated and short-dated, those that collect premium and those that require premium outlay up front. How’s an option trader to decide? These how-do-I-decide strategy questions come up all the time during our weekly trader Q&A webcasts. Here’s one we got during a recent period of market volatility (vol): “At what volatility level would you switch from a long options strategy—buying calls, puts, or vertical spreads, for example—to a short options strategy such as selling puts or put vertical spreads?” Like most trading decisions, the answer is simple: It depends.
OIC On-Demand Webinars
*****There are actually 4 sessions available – Session 1 is called, “Key Concepts for Options Investing.” Session 2 is titled, “Strategy Choice and Position Management;” Session 3 is titled, “Lawrence McMillan: Implementing Options;” Session 4 is titled, “How Advisors Can Find Opportunities With Options to Enhance Portfolios.”~MR
The Foundation of Options Pricing
Date: Wednesday, November 13, 2019. Time: 03:30 PM Central Standard Time. Duration: 1 hour. Understanding what goes into options pricing is a key part of making informed decisions about these diverse investment tools. And The Options Industry Council is ready to help you gain that understanding. On Nov. 13, join us for a free webinar called The Foundation of Options Pricing.
Theoretical Options Pricing
Date: Wednesday, November 20, 2019. Time: 03:30 PM Central Standard Time. Duration: 1 hour. If you have a good grasp on the fundamental aspects of how options are priced, it may be time to take the next step. That’s where The Options Industry Council’s Nov. 20 webinar, Theoretical Options Pricing, comes in.
Trump’s Big Reveal on Trade Is a Big Letdown
Robert Burgess – Bloomberg
Markets were widely anticipating that President Donald Trump would use his speech to the Economic Club of New York on Tuesday to trumpet progress on reaching the first phase of a trade deal with China. Instead, all he said was that an agreement “could happen soon.” That’s not exactly the language markets wanted to hear, which helps explain why equity markets spent much of the rest of the day erasing the bulk of their gains.
Charles Schwab Joins Chorus of Billionaires Opposing Wealth Tax
Josh Friedman – Bloomberg
Charles Schwab, founder of the giant discount brokerage firm, is joining other finance billionaires in opposing the wealth tax backed by presidential candidate Elizabeth Warren.
“It’s sort of wrong-directed in many ways,” Schwab said Tuesday for a future episode of “The David Rubenstein Show: Peer-to-Peer Conversations” on Bloomberg TV. “I came from really nothing and had plenty of incentive to create what we’ve created.”
****JB: There are currently 607 billionaires in the US. The US has a population of about 329 million. So this would suggest that only 0.00002% of the population have the moxie and incentive to make it as a billionaire and certainly should not be taxed for being such hard workers. Put another way, someone on Twitter (Jeremiah Red, I believe) noted that if you got $5,000/day every day since 1492, when Columbus discovered North America, you still would not have a billion dollars (even assuming you never spent a dime of the money you earned).