Betting against volatile stock market makes comeback as summer nears

May 28, 2021

Observations & Insight

**** JJL: There was a huge trade in the U.S. Treasury Bond roll on Wednesday that has been classified as “disruptive” by one market participant who contacted JLN. There were 8 orders of 29,999 all sent to the CME Group’s Globex match engine in a manner that made them sequential in the order book for the ZB calendar spread and caused the spread to move 150 ticks. The clip size or order size limit for such orders is 30,000, so the bunching of the orders just under that size appears to have been constructed to avoid the order size limit. My source said this type of sequencing or orders is not something available through commercial trading platforms, but rather something specifically designed to bunch the orders to avoid the exchange order size. The order tore through the available liquidity, moving the spread dramatically, causing the CME to adjust trades to about a 30 tick move. While significant moves in the calendar spread can occur if there are changes in the “cheapest to deliver,” this move was a multiple of any such volatility.

Lead Stories

Betting against volatile stock market makes comeback as summer nears
Saqib Iqbal Ahmed – Reuters
Some investors are revisiting a popular trade that has largely been out of favor since last year’s market tumble: betting against stock market turbulence.
Assets in the ProShares Short VIX Short-Term Futures ETF, a popular vehicle for betting against stock market gyrations, have nearly doubled over the last six months to $562 million.
Investors have also reaped big gains betting against products designed to profit from volatile markets.

There’s something different about the meme-stock sequel
Steve Goldstein – MarketWatch
The meme-stock madness has returned, but it’s a little bit different this time.
First, the similarities. AMC Entertainment, the movie-chain operator, shot up 36% on Thursday, and has more than doubled over the last four days. There is, of course, no fundamental news to drive such a rapid rise, and by contrast, Cineworld Group, an operator of U.S. and U.K. theaters, is up 8% over the last five days. Short sellers have lost $1.3 billion on the AMC surge, Bloomberg News reported, citing data from S3 Partners.

Analysis-New York could profit from Brexit tussle over euro derivatives
Huw Jones – Reuters
A hasty shift in euro-denominated derivatives clearing from London to Frankfurt to meet European Union post-Brexit demands may drive business to New York and shackle the 27-member bloc’s capital market, banks warn.

Oil Wavers With Supply Risks Clouding Demand Optimism
Alex Longley and Andres Guerra Luz – Bloomberg
Oil pared gains as investors weighed strong U.S. demand against concern that Iranian supplies will jump should sanctions on exports be lifted.
West Texas Intermediate was little changed after rising as much as 1% on Friday, but remained on track for its biggest weekly gain since mid-April. Prices have been stuck in a $10 range since March, and volatility on the global Brent benchmark has fallen to its lowest level since last August. A stronger dollar, which reduces the appeal of commodities priced in the currency, also pressured prices.

Bitcoin’s Wild Roller Coaster Ride Continues
Bitcoin is becoming a battleground stock, just like Tesla. Wall Street target prices for the electric vehicle maker range from about $100 to $1,200 a share. That means more volatility for traders.
Bitcoin, of course, isn’t an actual stock. There is no Bitcoin management team making strategic decisions and no Wall Street price targets to look up. But there are groups of increasingly polarized bulls and bears.

$2.2 Billion Notional in BTC Options Set to Expire on Friday, Bitcoin Contango Has Returned
According to data from Skew Analytics, more than 55,000 bitcoin options contracts worth $2.2 billion will expire on Friday. Statistics further show, as far as options are concerned, Deribit captures the lion’s share of contracts with 48,469 bitcoin options contracts ($1.95 billion notional) set to expire.

Crypto derivatives market down but not out as $3B expiry sours the mood
The spot price crash reveals a high correlation with the derivatives markets as nearly $3 billion worth of options stand to expire in May.
Bitcoin (BTC) led the entire cryptocurrency market through a tumultuous period after the majority of the cryptoverse was painted red on May 19, a day now also referred to as “Black Wednesday.”

Exchanges and Clearing

Bursa Malaysia Derivatives Records New All-Time High In Daily Trading Volume For the FTSE Bursa Malaysia KLCI Futures
The FTSE Bursa Malaysia KLCI Futures (“FKLI”) traded on Bursa Malaysia Derivatives recorded a new all-time high in daily trading volume on 27 May 2021. The derivative exchange recorded a volume of 66,887 contracts, surpassing the previous record of 65,000 contracts registered precisely a year ago on 27 May 2020. The FKLI provides market participants, both institutional and retail investors, exposure to the underlying FTSE Bursa Malaysia Kuala Lumpur Composite Index (“FBM KLCI”).

Eurex extends EnLight with FX derivatives
Eurex press release
Eurex EnLight, the fully integrated RFQ platform, already available for most equity, equity index and fixed income options and futures tradable on Eurex, has been further extended. We spoke to Andre Eue, Head of Market Development at Eurex, and Joshua Hurley, FX Sales and Business Development at Eurex, about the enhancements.
What exactly is happening on Eurex EnLight and when?
Shortly after the migration of our FX products onto the Eurex T7 platform on 31 May 2021, we will also expand our integrated T7 RFQ mechanism to cover our growing FX market.

New Futures and Options on MSCI indexes available for trading from 31 May 2021
Eurex press release
Derivatives on MSCI China Hong Kong Listed Large Cap, MSCI Hong Kong Listed Large Cap, MSCI China Tech 100 and other Asian underlyings as well as MSCI ESG Enhanced Focus, Europe Sector and USA Factor indexes
MSCI China Hong Kong Listed Large Cap and MSCI Hong Kong Listed Large Cap derivatives offer investment opportunities in Hong Kong and Chinese companies. These indexes have solely Hong Kong listed constituents.

Regulation & Enforcement

China regulator says crude oil, palm oil options to start trading in June
Reuters Staff
China has approved trading of crude oil and palm oil options on the Shanghai International Energy Exchange and the Dalian Commodity Exchange respectively, its securities regulator said on Friday, adding to a range of products open to foreign participants for trading.

CFTC Charges Chicago Commodity Pool Operators, Owner, and Former Chief Portfolio Manager with Fraud and Supervision Failures; Former Chief Risk Officer Settles Fraud Charge
The Commodity Futures Trading Commission today announced filing charges in federal court against Chicago commodity pool operators (CPOs) LJM Partners Ltd and LJM Funds Management Ltd, (collectively LJM), their Chairman, owner and registered associated person (AP) Anthony J. Caine of Colorado and Chief Portfolio Manager Anish Parvataneni of Illinois with commodity pool fraud and fraud in connection with options on futures contracts for false or misleading statements about worst-case losses, risk management, and LJM’s risk profile.

EU antitrust regulators fine ICAP $7.9 million for yen cartel
EU antitrust regulators on Friday fined the world’s largest interdealer broker ICAP 6.45 million euros ($7.9 million) for taking part in several yen interest rate derivatives cartels.


With Correction Fears Rising, It’s Time to Explore Low Volatility and Quality Stocks
Evie Liu – Barron’s
Investors have been favoring stocks, and assets such as cryptocurrencies, that look a lot like lottery tickets, taking on a high probability of poor returns for a small chance of large gains. That has bid up the prices of riskier stocks, while leaving more-stable stocks underappreciated.
“If you think about what happened to GameStop, the popularity of Dogecoin, the increasing online trading, and the high volume of call buying in the options market, investors have really been embracing risk,” says Nick Kalivas, Invesco’s head of factor strategy.

GameStop Reddit Rally May Be Threatened by Best Buy Blowout
Tae Kim – Bloomberg
This year’s meme-stock phenomenon GameStop Corp. is soaring again. But the Reddit crowd that loves trading the name may be getting too exuberant, especially considering Best Buy Co.’s latest strong earnings report. The consumer-electronics retailer is crushing it at both its physical stores and e-commerce business, making GameStop’s turnaround that much more of a challenge.


Diversification Isn’t the Only Tool Investors Have to Minimize Risk
Jon Lukomnik and James P. Hawley – Barron’s
Sustainable investing is hot. Investment firms spend billions on stewardship activities and in search of data. Investors submit nearly 500 environmental and social proxy proposals a year to U.S. corporations. Investor-led coalitions fight for diversity, against antimicrobial resistant bacteria, for mining safety, and, just this week, for seats on the board of Exxon in a climate fight. Why?
There are three standard answers: First, those who integrate environmental, social, and governance factors into their security analysis seek to outperform by considering risks and opportunities that others miss. Second, socially responsible investors attempt to align their portfolios and values. Third, impact investors try to improve society and the planet.

The human factor — why data is not enough to understand the world
Gillian Tett – Financial Times
A couple of years ago, staff at a Google “tech incubator” called Jigsaw made an important breakthrough: they realised that while their company has come to epitomise the power of technology, there are some problems that computers alone cannot solve. Or not, at least, without humans.
Jigsaw, wrestling with the problem of online misinformation, quietly turned to anthropologists. These social scientists have since fanned across America and Britain to do something that never occurred to most techies before: meet conspiracy theorists face-to-face — or at least on video platforms — and spend hours listening to them, observing them with the diligence that anthropologists might employ if they encountered a remote community in, say, Papua New Guinea.

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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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