As oil collapses, some options players bet on a bounce; Dow Jones Industrial Average Slumps as Oil Prices Continue to Crater

Apr 21, 2020

Observations & Insight

The Spread: Hangin’ In There

This week on The Spread: Worldwide traded options volumes rise, Will Acworth notes the impact of the closing of the trading floors on the options markets, and more.

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Lead Stories

As oil collapses, some options players bet on a bounce
April Joyner – Reuters
As U.S. crude prices dropped below $0 for the first time ever on Monday, some options investors were betting on a rebound.
Call options – used for upside participation – accounted for around two-thirds of the 3.5 million options contracts traded Monday on the United States Oil Fund LP, the largest U.S. crude exchange-traded fund.

****JB: It should come as no surprise that oil will figure prominently in today’s newsletter. Oil going to nearly negative $40/barrel is unprecedented. The only thing I am surprised about is not seeing (so far) a story about someone making a killing shorting oil.

Dow Jones Industrial Average Slumps as Oil Prices Continue to Crater
Carleton English, Nicholas Jasinski and Steve Goldstein – Barron’s
It’s another turbulent day on Wall Street as rapidly falling oil prices weigh on the stock market. Investors appear to be moving to shed risk from their portfolios.
Futures on West Texas Intermediate crude oil for June delivery plunged 35% to $13.31 a barrel as the combination of oversupply and weak demand is threatening to fill up storage capacity in the U.S. On Monday, the May WTI contract, which expires Tuesday, went negative, marking the first time the price of oil has traded below zero. It rebounded to $5.39 a barrel on Tuesday, but on very thin trading volume given its imminent expiration.

Exxon Mobil Option Trader Makes Big Bearish Bet On More Downside After Oil Prices Drop Below $0
Wayne Duggan – Yahoo Finance
Exxon Mobil Corporation (NYSE: XOM) has been one of the worst-performing large stocks in the entire S&P 500 in over the past decade, and is off to a horrendous start to 2020 thanks to COVID-19.
WTI crude oil prices plummeted more than 100% to negative $3 per barrel at the time of writing on Monday, and at least one large option trader is betting the worst is yet to come for Exxon.

Who may have gotten crushed — or won big — by the historic plunge below $0 a barrel for oil?
Mark DeCambre – MarketWatch
Crude-oil prices for May carved out a dubious place in history on Monday, plunging the most on record and notching the first settlement ever in negative territory.
The unprecedented move in the oil contract now has investors wondering if one or more big energy players, or speculators, has been left holding on to sizable losses as the May West Texas Intermediate crude contract closed Monday trade at negative-$37.63 a barrel, marking an eye-popping one-day drop of $55.90, or 306%, according to Dow Jones Market Data.

‘We don’t think this is the end of it’: Goldman Sachs’ commodities expert explains why oil market chaos can continue into mid-May
Ben Winck – Markets Insider
WTI crude oil contracts for May delivery slid into negative prices on Monday amid an unprecedented supply glut.
Goldman Sachs’ commodities expert thinks stabilization is weeks away.

What negative US oil prices mean for the industry
Derek Brower, David Sheppard and Anjli Raval and Gregory Meyer – Financial Times (No Paywall)
Benchmark US crude oil prices traded with negative prices for the first time in history on Monday, sending shockwaves through the global energy sector.
But what are negative prices and what do they mean for the wider industry?

‘They Don’t Know What to Say’: Company Earnings Add to Confusion
Sarah Ponczek – Bloomberg
Earnings season is supposed to be a time of clarity, giving investors a detailed look into the health of corporations and a chance to hear from executives about what’s to come. Not this time around.
One week in, and the only thing that’s clear is that no one feels confident making profit or sales forecasts for coming months. Analyst earnings estimates, already all over the map in the early days of the coronavirus pandemic, remain incredibly inconsistent, with gaps between the highest and lowest among individual stocks holding near records.

Leveraged ETF Trading Surge Means Japan Stocks Calm May Not Last
Min Jeong Lee and Toshiro Hasegawa – Bloomberg
Japan stocks have regained some calm after the coronavirus wreaked havoc on global markets, but strategists are warning that the increased trading of speculative exchange-traded funds could mean more tumult ahead.
On Friday and Monday, two of the top three securities that changed hands the most by value were leveraged ETFs betting on the Nikkei 225 Stock Average’s moves. By nature, those vehicles use derivatives to amplify the return of the underlying securities, causing larger price swings when positions are added or reduced.

Inside Volatility Trading: April 21, 2020
Kevin Davitt – Cboe blog
Cboe’s Inside Volatility pieces attempt to illuminate the investment landscape through a unique lens whose filters include index options, history, geopolitics…and some music. To wit, 1973 was a monumental year in both the United States and globally.

Bitcoin Options volume drops, but trading of June contracts may spike IV
Biraajmaan Tamuly – AMB Crypto
After lacking any substantial activity towards the end of March, Bitcoin’s derivatives market registered a certain buzz around itself in the month of April. At the time of writing, Bitcoin’s price was up by almost 90 percent from its yearly low following the crash on 13 March, with the world’s largest digital asset able to consolidate higher in the range without frequent bouts of volatility.

Exchanges and Clearing

CME Clearing Plan to Address the Potential of a Negative Underlying in Certain Energy Options Contracts
CME Group – April 8, 2020
The purpose of this advisory is to assure CME clearing firms and end clients that if major energy prices continue to fall towards zero in the coming months, CME Clearing has a tested plan to support the possibility of a negative options underlying and enable markets to continue to function normally.

Regulation & Enforcement

CFTC Approves New Cryptocurrency Derivatives Platform — Bitnomial to Offer Regulated
Bitcoin Futures
Kevin Helms – Regulation Bitcoin News
The U.S. Commodity Futures Trading Commission (CFTC) has approved a new bitcoin derivatives trading platform. Bitnomial Exchange will list margined and physically delivered bitcoin futures and options. Besides Bitnomial, the CFTC has only approved a handful of other platforms to offer bitcoin derivatives trading, such as CME, Cboe, and Bakkt.

Options Technical Update #2020 – 3 Update: Nasdaq Options Markets Update SQF and QUO Technical Specifications in Support of CAT
Nasdaq has updated the Quote Using Orders (QUO) technical specifications for The Nasdaq Options Market (NOM), and the Specialized Quote Feed (SQF) technical specifications for all 6 Nasdaq option markets, to support changes required for the Consolidated Audit Trail (CAT) reporting.

Options Regulatory Alert #2020 – 13 Off-Exchange RWA Transfers
Nasdaq Phlx (“Phlx”), The Nasdaq Options Market (“NOM”), Nasdaq BX (“BX Options”), Nasdaq ISE (“ISE”), Nasdaq GEMX (“GEMX”) and Nasdaq MRX (“MRX”) recently adopted an off-exchange RWA Transfer rule at Options 6, Section 6.


QB Launches First Options on Futures Execution Algorithm, “Striker” — Quantitative Brokers
Quantitative Brokers
Quantitative Brokers (QB), an independent provider of advanced execution algorithms and data-driven analytics for futures and U.S. Cash Treasury markets, today announced the launch of a first-ever, intelligent algorithm for options on futures markets. Striker joins QB’s suite of award-winning best execution algorithms: Bolt, Strobe, Legger, Closer, Octane and The Roll.
Striker is the first dynamic agency algorithm for options on futures markets that incorporates both realtime cointegration and implied pricing calculations to determine fair value. The strategy also employs QB’s industry-leading, dynamic passive and aggressive child order placement logic. Striker transactions are also seamlessly displayed in QB’s complementary Transaction Cost Analysis (TCA) platform, another industry first.


Avoid oil stocks, as historic divergence with oil prices suggests too much volatility to risk buying, analyst says
Tomi Kilgore – MarketWatch
The dislocation in the crude oil and oil-related stocks has reached unprecedented levels, which makes the energy sector a little too hot to handle for investors, some analysts say.
That comes as the front-month, soon-to-expire May futures contract for West Texas Intermediate crude took a historic plunge as the glut of oil and the lack of storage space sent prices into negative territory, meaning sellers were willing to pay buyers to take physical delivery of the oil. There is also a big drop in demand, as the COVID-19 pandemic has reduced travel and economic activity.

Crude oil drops to historic lows — how to trade energy stocks
Keris Lahiff – CNBC
It was a historic day on oil markets.
West Texas Intermediate crude for May delivery, a contract expiring Tuesday, fell more than 300% to negative $37.63. It was the first time that crude oil had fallen below zero. Oil has been crushed by Covid-19 disruptions and a price war between Saudi Arabia and Russia.


Q1 2020 Trends in Futures and Options Trading
Global trading of futures and options surged in the first quarter as markets responded to the coronavirus pandemic. The total number of contracts traded on derivatives exchanges worldwide rose to 11.41 billion, an all-time quarterly record and an increase of 43.2% over the first quarter of 2019. Total trading of futures reached 6.42 billion contracts in the first quarter, up 45.8% from the first quarter of 2019. Options volume reached 4.99 billion, up 40% from the same period last year. Open interest, which measures the number of outstanding contracts, was 921.3 million at the end of March, up 5.2% compared to the same point in time in 2019. In this webinar, FIA will present data on volume and open interest across the global listed derivatives markets, with break-downs by asset class and region.
Host: Will Acworth, FIA
Date/Time: Wednesday, April 22, 2020 | 10:30 a.m. – 11:30 a.m. ET

FIA cancels IDX, L&C and Commodities conferences
FIA today canceled three upcoming conferences due to on-going health concerns and governmental restrictions caused by the COVID-19 outbreak. These include the IDX conference scheduled for June 1-3 in London, the Law & Compliance conference scheduled for April 29 – May 1 in Washington, D.C. and the U.S. Commodities forum scheduled for June 22 in Houston. In conjunction with the IDX cancellation, FIA announced the postponement of its Futures for Kids Gala, which raises funds for children’s charities on the last evening of the IDX event, to later in the year.


Stockpickers failed to take ‘big chance’ in market rout
Steve Johnson – Financial Times
Last month’s market crunch was the biggest test for stockpickers since the global financial crisis — and the evidence is growing that they flunked it.
In recent years active managers have consistently failed to beat benchmarks, often blaming historically low levels of volatility and dispersion between sectors. Stocks have tended to gently rise or fall in unison, making it hard for stockpickers to find an edge that would justify the higher fees they charge.

The Markets Are Wild While You’re Asleep
Gunjan Banerji – WSJ
Trading in overnight stock futures has skyrocketed, adding to a nearly nonstop stretch of market activity and luring more investors to join in the action.
Among the most-traded are E-mini S&P 500 futures contracts, whose overnight trading volumes have surged to a record this year, according to CME Group Inc. data through March. Daily average volumes have topped 500,000 contracts, more than double the number recorded in 2017.

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Past Options Newsletters

The Spread – July 30, 2021

The Spread – July 30, 2021

Earnings season in full bloom; Options lead year-to-date derivatives volume; Robinhood’s IPO; John gets real with Get Real VR: Conflicting factors underpin volatility; Cboe cleared for fall European competition; and the Cboe Options Institute’s Kevin Davitt talks about vega in this week’s “Term of the Week.”

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