Bonds and Stocks Might Not Be Singing to the Same Trump Tune; VIX Call Buying Picks Up as Stocks Hit Record Highs; Hong Kong Stock-Hedging Costs Tumble Before Chinese New Year

Jan 26, 2017

Observations & Insight

OIC: Camelback 2017
Now in its 35th year, the Options Industry Conference is the premier annual gathering for top-level management and trading professionals to exchange ideas, strengthen relationships and forge new connections.

****SD: May 10-12. Now if only they could move the conference a few months and sync up with Spring Training…

Lead Stories

Bonds and Stocks Might Not Be Singing to the Same Trump Tune
Luke Kawa – Bloomberg
MOVE, VIX. Get out the way. The CBOE Volatility Index, a measure of the implied volatility of the S&P 500 Index commonly known as the VIX, closed below 11 for the first time since July 2014 on Wednesday. Meanwhile, Merrill Lynch’s Option Volatility Estimate Index (MOVE) — a yield curve weighted measure of implied volatility in U.S. Treasuries — jumped to 77, sending the ratio between these two measures to levels consistent with the 2013 taper tantrum.

****SD: Oh, man — what a lede sentence from Mr. Kawa. To this day, one of the most entertaining concerts I’ve ever been to was Chris Bridges (Ludacris) playing a 1,500 person room in Minneapolis. He’s also an Illinois native who attended my high school for a year. Other alumni of note: Dan Castellaneta (voice of Homer Simpson) and Ernest Hemingway. That’d be a fun dinner party…

VIX Call Buying Picks Up as Stocks Hit Record Highs
Karee Venema – Schaeffer’s Research
Stocks have resumed their record-setting run this week, with the release of several White House policy announcements seemingly breathing new life into the Trump rally. What’s more, a round of well-received blue-chip earnings helped send the Dow soaring past the psychologically significant 20,000 mark. As such, the CBOE Volatility Index (VIX) — or the market’s “fear gauge” — is hovering at its lowest levels since July 2014. Nevertheless, while put volume on VIX futures ran at an accelerated clip on Wednesday, 1.6 times the average intraday rate, the overriding trend in recent weeks has been toward long calls.

****SD: Never thought I’d be thinking of 14 as such a difficult level. Since 1992, the VIX has closed under 11 only 2 percent of the time.

Hong Kong Stock-Hedging Costs Tumble Before Chinese New Year
Livia Yap – Bloomberg
For investors wanting to hedge Hong Kong shares, the market offers the cheapest options among major regional peers. Ahead of the Chinese Lunar New Year holiday, contracts protecting against swings in the Hang Seng Index in the coming month have tumbled to their lowest prices in more than a year versus Australia’s S&P/ASX 200 Index, Korea’s Kospi 200 Index and India’s NSE Nifty 50 Index. Relative to the Nikkei-225 Stock Average, they’re near their cheapest since September.

****SD: This Saturday (Jan 28) we enter the year of the Rooster.

VIX Near Record Low Ignores Risks Revealed in Swaptions: Chart
V Ramakrishnan – Bloomberg
As the stock-market fear gauge known as the VIX flirts with an all-time low, rates volatility has remained stubbornly elevated, breaking a relationship the markets shared in the weeks before the U.S. election.

Dow’s 20K record isn’t the only sign of a ‘fearless’ Wall Street
Carleton English – New York Post
Wall Street is showing little sign of turning against President Trump’s rally. Investors pushed all three major indexes — the Dow Jones industrial average, the S&P 500 and the Nasdaq — to record highs on Wednesday and showed signs that they may not be ready to call it quits just yet. The VIX, Wall Street’s so-called “fear gauge,” fell to 10.8, a 52-week low and the smallest reading since it touched 10.3 in July 2014, just as the Dow leapfrogged 17,000.

****SD: Hey, Trump’s favorite paper covered volatility! Now we can be sure that he is aware of what’s going on with the VIX.

Massive Spread Trade Sends SPY Call Volume Soaring
Celeste Taylor – Schaeffer’s Research
The Dow Jones Industrial Average finally hit the 20,000 mark, and the SPDR S&P 500 ETF Trust is also notching new record highs. With market momentum building, SPY could be preparing to take its upswing even higher. It looks like one trader in particular is hoping for another move to the upside before February options expiration.

Banks “confident” despite reduced market-making
Julie Aelbrecht – Futures & Options World
The ECB said banks saw their credit terms for OTC derivatives deteriorate
Banks remain confident of their ability to provide liquidity in times of stress despite a reduction in their fixed income and derivatives market-making activities, a report by the European Central Bank has found. The ECB published on Wednesday its quarterly report on securities financing and over-the-counter derivatives.

Exchanges and Clearing

TASE blames Basel, market-makers for options dip
Luke Jeffs – Futures & Options World
Israeli exchange said single stock options trading volume was down 35% in 2016
The Tel Aviv Stock Exchange has blamed the Basel capital rules on banks and the reduction in market-making for a drop in options trading last year, reflecting a slow year for the world’s equity derivatives markets. The Tel Aviv exchange said monthly options on its flagship TA-25 blue-chip index fell in 2016 a quarter compared with the previous year and single stock options trading slumped more than a third compared to 2015.

****SD: ADV on TA-25 index monthly options down 25 percent from 2015.

Investors undervalue DB1-LSE deal – analyst
Futures & Options World
Frankfurt and London-based groups confirmed their plan to merge in March
Investors are undervaluing the planned mega-merger of European exchange giants Deutsche Boerse and the London Stock Exchange, according to analysts at Morgan Stanley. Anil Sharma, who leads the US investment bank’s European diversified financials research unit, upgraded both bourses on Thursday citing strong balance sheets, a favourable interest rate environment and potential costs savings.

Nasdaq/ISE Announces Regulation SCI BC/DR Testing
Nasdaq will host its annual Business Continuity and Disaster Recovery Plan test on Saturday, October 14, 2017.


Cowen Expands Options and Event Driven Strategies Sales and Trading Team
Business Wire via Yahoo
Cowen Group, Inc. today announced that Eric M. Rose has joined Cowen’s Options and Event Driven Strategies sales and trading team. Mr. Rose is a Managing Director and Senior Derivatives Trader with a focus on risk arbitrage and event driven situations. Mr. Rose will report to Kyle Solomon, Cowen’s Head of Options and Event Driven Strategies.

Regulation & Enforcement

SEC names Michael Piwowar acting chairman
The Securities and Exchange Commission has named Michael Piwowar its acting chairman, according to the agency’s website.


Renaissance Capital Chooses Itiviti to Consolidate Trading Operations
Rosemary Barnes – Finance Magnates
Itiviti, a technology provider for the capital markets industry, today announced that Renaissance Capital, an emerging and frontier markets investment bank, has chosen the Tbricks by Itiviti platform for its options market making, Delta-one algo trading.

ACTIV One Ticker Plant Tests on Google Cloud Platform
John D’Antona Jr. – Traders News
ACTIV Financial, a global provider of multi-asset financial market data and real time publishing solutions, has completed Phase 1 of performance testing its ACTIV One (Real Time Market Data Ticker Plant) on Google Cloud Platform (“GCP”) which validates siting production head end ticker plant technology within the Public Cloud framework.

PFSOFT’s Protrader Selected by Prime Broker Maybank Kim Eng Securities
Aziz Abdel-Qadar – Finance Magnates
PFSOFT, a developer of trading software for a wide range of market participants, today announced its partnership with Maybank’s prime broker arm, part of investment banking unit Maybank Kim Eng Holdings Ltd, to give its clients access to global equity and derivatives markets using Protrader.


The Theory Behind Heavy Put-Selling On 2 Low-Priced Stocks
Karee Venema – Schaeffer’s Research
When asked to identify stocks that offer potentially attractive trading opportunities, it’s likely that mobile game maker Glu Mobile Inc. and online discount marketplace Groupon Inc don’t immediately come to mind. Nevertheless, options activity has been accelerated of late for both low-priced stocks. Drilling down even further reveals that some traders may be using options to simulate stock ownership.

Vertical Options Spreads Explained
T.J. Neil Sr., Tradewise Advisors – The Ticker Tape
Feeling pretty experienced with trading long calls, long puts, and writing covered calls? Vertical spreads are one of the building blocks of options trading, and they can be a logical next step.

Is It Time to Bet Against Retail Stocks
Steven M. Sears – Barron’s
The Dow Jones Industrial Average just crossed 20,000 for the first time, but a key area – retail – may be in trouble. If so, it could be a great time to sell off the sector. Investors, as we have previously noted, typically rely on retail stocks to confirm any broad rallies. The thinking is elementary: The U.S. economy is driven by consumer spending. If consumer spending is weak – and it has been – it suggests the stock market as a whole may falter.

Hedging for Alphabet Earnings Is Costliest Since 2009: Chart
Cecile Vannucci – Bloomberg
Hedging against a stock decline in Google parent Alphabet Inc. on the eve of its earnings report hasn’t been this expensive since 2009, even as implied volatility is lower than before previous releases.


Eurex Exchange and DEGIRO enter knowledge partnership
Eurex Group
DEGIRO, one of Europe’s largest retail brokers and Eurex, Europe’s largest derivatives exchange team up to jointly educate retail investors: A new section on DEGIRO’s website explains the products listed on Eurex with input coming directly from the extensive knowledge pool of the derivatives exchange.


Research: Firms Give More Stock Options When They’re Committing Fraud
Andrew Call, Simi Kedia and Shivaram Rajgopal – Harvard Business Review
Whistleblowers can play in a big role in uncovering financial misconduct. For example, look at Sherron Watkins, formerly of Enron, and Cynthia Cooper, formerly of WorldCom. Both women helped uncover massive frauds inside their organizations that ultimately cost investors billions of dollars.

Risk Awards 2017: The winners
Sustainability and consistency are not the same thing, but in the world of derivatives market-making, they are linked. A business that is not run sustainably will, in the end, be inconsistent: it will widen its spreads, cut clients, or retreat from some products.

****SD: Winners determined by who has the largest total after rolling their dice.

John Lothian Newsletter

We visit more than 100 websites daily for financial news (Would YOU do that?)

“John Lothian and Company… our industry intelligence.”

Rick Lane

CEO, Trading Technologies

Past Options Newsletters

Pin It on Pinterest

Share This Story