Bulls are back in the Nasdaq and options are aflutter; Never-Ending Brexit Sends Traders to Distant Market Corners

Oct 20, 2020

Observations & Insight

$8,241/$300,000 (2.7%)
Christopher McNulty

Lead Stories

Bulls are back in the Nasdaq and options are aflutter
Saqib Iqbal Ahmed and April Joyner – Reuters
Investors are once again chasing upside in shares of tech companies after a sharp sell-off in U.S. equities last month.
Despite last week’s market dip, the tech-heavy Nasdaq remains around 3% away from its record high. Traders – many of them retail investors – have plowed back into call options, used to position for gains in shares.

Never-Ending Brexit Sends Traders to Distant Market Corners
Todd White – Bloomberg
With FX options costly, alternative strategies look appealing; Irish-French spread, inflation, stock derivatives all in focus
As Brexit sends hedging costs soaring again, strategists are recommending a slew of less crowded ways to trade the never-ending political drama. From euro-area bond spreads and equity derivatives to the shape of the inflation curve, investors can place bets on Britain’s economic future, without speculating directly on its volatile currency.

In New 60/40 Portfolio, Riskier Hedges Are Displacing U.S. Debt
Vivien Lou Chen and Katherine Greifeld – Bloomberg
Surging demand seen in options to offset stocks at Swan Global; Currencies are another alternative ‘few are good at’: Toews
The hunt for new hedges is in full gear. While much has been made about the search for yield in a world of ultra-low interest rates, valuations in the U.S. Treasury market also leave very little room for price gains to counteract losses should the high-flying stock market turn lower. It’s a dilemma that could reshape the classic investing strategy of 60% stocks and 40% bonds as the Federal Reserve holds rates near zero for the foreseeable future.

The Dow Jones Industrial Average Drops 400 Points as Election Narrative Goes Wrong
Ben Levisohn – Barron’s
The Dow Jones Industrial Average suffered its biggest drop since Sept. 23—but don’t just blame the lack of stimulus. The story is more complicated than that.
The Dow declined 410.89 points, or 1.4%, while the S&P 500 fell 1.6% and the Nasdaq Composite dropped 1.7%.

Sterling driven by weaker dollar; traders hope for Brexit trade deal
Olga Cotaga – Reuters
Sterling rose against the dollar but fell versus the strong euro on Tuesday, with investors still searching for clues on how likely it was that Britain would reach a trade deal with the European Union by the end of the year.

SoftBank Amasses Over $20 Billion in Public Stock Unit
Giles Turner and Dinesh Nair – Bloomberg
SoftBank Group Corp. charged ahead with its new public stock trading arm, increasing equity positions to more than $20 billion despite an initially skeptical response from shareholders, according to a person familiar with the investments. Bloomberg reported in August that SoftBank had been targeting more than $10 billion and that the sum could reach into the tens of billions. The Japanese conglomerate considered tempering its trading plans in early September after reports that SoftBank’s spending spree was stirring froth in tech stocks. The news erased about $9 billion in market value for SoftBank at the time.

China (Partially) Opens Up To Foreign Investment
RCM Alternatives blog
Recently the CSRC, People’s Bank of China, and the State Administration of Foreign Exchange finally released measures for something we’ve been patiently waiting (and working tirelessly at) for over 2 years: guidelines expanding the scope of investable products for Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (which we’ll collectively just refer to as QFII).

Inside Volatility Trading: October 20, 2020
Kevin Davitt – Cboe
Markets are fundamentally driven by supply and demand. In general, a well-supplied market will push prices lower, all else constant, and vice versa. Derivative markets, particularly the implied volatility of option values, are reflective of the overall supply/demand dynamic at a given point in time. A shortage of supply typically pushes prices higher.

Exchanges and Clearing

Technical Glitch Disrupts Trading on Major European Exchanges; Outage, closing-auction problems are the latest in a series of shutdowns on world’s biggest exchanges
Joe Wallace – WSJ
A technical problem halted trading on exchanges owned by Euronext, hitting activity at one of the busiest times of the year for European stock markets. Monday’s glitch stopped trading in stocks, bonds, commodities and derivatives on exchanges in Paris, Amsterdam, Lisbon and elsewhere. Before a fresh problem struck later in the day, Euronext initially fixed the cause of the outage, and trading in most markets resumed by early Monday afternoon in Europe, a spokesman for the exchange operator said.

*****MR: For an update to this story, see the Reuters story “Euronext resumes trading as outage raises concentration concerns” by Thyagaraju Adinarayan and Sudip Kar-Gupta.

NYSE Says It’s Ready to Leave N.J. With Trade Tax Threatened
Elise Young – Bloomberg
The New York Stock Exchange told New Jersey lawmakers that it’s prepared to move operations out of state should they impose a new tax on electronic trades via data servers.
In late September, the world’s largest exchange by market capitalization conducted a test “for a wholesale transition out of New Jersey,” Hope Jarkowski, co-head of government affairs for NYSE parent Intercontinental Exchange Inc., said during an Assembly financial institutions and insurance committee hearing conducted by video feed.

MIAX Options Exchange – SPIKES Special Settlement Auction Settlement Reference Price Opening Width And Valid And Priority Quote Width Tables Used In The October 21, 2020 SPIKES Special Settlement Auction
Due to sustained market volatility, MIAX Options will continue to use the Settlement Reference Price Opening Width and Valid and Priority Quote Width tables detailed in MIAX Options Regulatory Circular 2020-11 for opening the SPY November 20, 2020 options used in the October 21, 2020 SPIKES Special Settlement Auction.

LCH successfully completes transition to SOFR discounting
Over one million contracts transitioned with a total notional of $120 trillion; Scope of transition included cleared interest rate swaps in SwapClear, deliverable and non-deliverable forwards and options in ForexClear, and cross-currency swaps in SwapAgent; LCH calculated and processed compensation payments for resulting valuation changes and created compensating swap hedges for risk changes; Client swap hedges totalling $24bn net notional successfully auctioned off at close to zero cost; Auction very well-supported with 18 primary dealer banks submitting competitive bids; LCH, a leading global clearing house, today announced that it has successfully transitioned over one million cleared contracts from Fed Funds to SOFR discounting and Price Alignment Interest (PAI).
The move is an important component of industry-wide efforts to transition financial contracts from LIBOR to Risk Free Rates (RFR). The CCP discounting transition formed a key part of the Paced Transition Plan set in place by the ARRC (Alternative Reference Rates Committee) in 2018.

Options Trader Alert #2020 – 29 Reminder: Nasdaq Announces Regulation SCI BCP/DR Testing
As announced in ERA #2020-3 and ORA #2020-9, Nasdaq will host its annual Business Continuity and Disaster Recovery Plan test on Saturday, October 24, 2020.

MIAX Exchange Group – Options Markets – Delisting of Superior Industries International, Inc. (SUP)
MIAX Options
Superior Industries International, Inc. (SUP) will be de-listed from the MIAX Options Exchange, MIAX PEARL Options Exchange and MIAX Emerald Options Exchange effective today, Tuesday, October 20, 2020. All GTC orders resting on the MIAX order books in SUP will be canceled.

MIAX Exchange Group – Options Exchanges – Have Revoked Self-Help on ARCA Options Exchange
MIAX Options
MIAX Options, MIAX PEARL Options & MIAX Emerald Options have revoked self-help on the ARCA Options Exchange as of 14:08. All MIAX systems are operating normally. If you have any questions, please contact Trading Operations at (609) 897-7302 or TradingOperations@MIAXOptions.com.

MIAX Options Exchange – SPIKES Special Settlement Auction Settlement Reference Price Opening Width and Valid and Priority Quote Width Tables used in the October 21, 2020 SPIKES Special Settlement Auction
MIAX Options
Due to sustained market volatility, MIAX Options will continue to use the Settlement Reference Price Opening Width and Valid and Priority Quote Width tables detailed in MIAX Options Regulatory Circular 2020-11 for opening the SPY November 20, 2020 options used in the October 21, 2020 SPIKES Special Settlement Auction.

Cboe Becomes Primary Listing Exchange for O’Shares ETFs
Cboe Global Markets, Inc. (Cboe: CBOE), a market operator and global trading solutions provider, today announced that the entire suite of O’Shares ETFs successfully transferred to Cboe BZX Exchange from NYSE Arca on Monday, October 19. O’Shares ETFs are designed for investors with objectives ranging from wealth preservation and income to growth and capital appreciation. The family of O’Shares ETFs includes the O’Shares U.S. Quality Dividend ETF (OUSA), O’Shares Global Internet Giants ETF (OGIG), O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM), and O’Shares Europe Quality Dividend ETF (OEUR). Each ETF reflects O’Shares’ rules-based investment philosophy, including quality as an important characteristic.


Trading Technologies Contracts with Applied Derivatives for Distribution of the TT Platform from South Africa
Trading Technologies International, Inc.
Trading Technologies International, Inc. (TT), a global provider of high-performance professional trading software, infrastructure and data solutions, and Applied Derivatives PTY LTD, a leading securities trading and brokerage firm based in Cape Town, today announced they have entered into an agreement whereby Applied Derivatives becomes the first broker to distribute the TT platform from South Africa. Applied Derivatives is providing international clients with access to the Johannesburg Stock Exchange (JSE) for trading of all equity and currency derivatives, including futures and options, listed on the JSE Derivatives Market.


Tesla’s Earnings Will Be Dramatic. How to Play It With Stock Options.
Steven M. Sears – Barron’s
The question that now hangs over Tesla is if the stock will be recharged when the company reports third-quarter earnings late Wednesday or if it will simply pause after an extraordinary rally.
So far, the verdict in the options market is that Tesla’s stock will race higher on the report and extend what has been one of the most extraordinary rallies in 2020.

“How to Use Options Strategies & Key Mechanics” Takeaways
Tony Battista – tastytrade
When trading options, you have two main components to focus on: the strategies and the mechanics.
The strategy is your “plan of attack” for opening positions, while mechanics are your game plan for managing your strategies over time. Today, we’re going to overview six of the most commonly used strategies at tastytrade as well as their mechanics.

Matt Amberson Joins Jill Malandrino Of Nasdaq TradeTalks
ORATS blog
Matt Amberson, Principal at ORATS, joined Jill Malandrino of Nasdaq TradeTalks to discuss VOLQ implied volatility measurement of the NDX, call buying in NDX components, election effects on options and earnings.

Call buying is driving volatility and a gamma squeeze
ORATS blog
The last two months of market and volatility action is unparalleled. Usually, when the market rises, volatility falls — since 2006, this has happened 90% of the time. The last two months, however, has seen a volatility rise connected to a market rise 25% of the time, more than double the historical average.


What’s been driving US equity markets outperformance?
Despite falling more steeply in the March downdraft, US equities have handily outperformed international stocks this year. Indeed, the US has gained much of its edge since June, when the rally elsewhere began losing steam. And now, despite a volatile cocktail of global pandemic, political wrestling over a stimulus bill and approaching a looming general election which could be the most contentious in US history, US equity markets have been going strong.

What’s behind a 55% surge in the US large-cap Russell 1000 since March and a nearly 5% upswing for the US small-cap Russell 2000 in October?

And how can investors tap into US equity market opportunities?

FTSE Russell is joined by special guests from CME Group and BlackRock/iShares to examine the current state of the US equity market, consider what factors may be driving its outperformance between US large- and small-cap stocks and suggest ways investors can use trading and product strategies to manage risk and tap into market opportunity.

Live online Oct 22 11:00 am CST

FIA Disaster Recovery Test
The 17th Annual Industry-Wide Disaster Recovery Test
24 October 2020 • 9:00 AM – 5:00 PM EST
On October 24, 2020, the futures industry will conduct its 17th annual FIA Disaster Recovery Test.
The annual exercise, an initiative of the FIA Market Technology division, is a coordinated industry effort to test business continuance, process recovery, connectivity and functionality between exchanges, clearinghouses and their member firms. Participants are provided with an opportunity to test the resiliency of their trading systems by conducting order entry from alternate recovery sites and verifying connectivity with exchanges and clearinghouses.
The test remains a valuable apparatus for the industry to assess its response to potential disaster scenarios and is an extraordinary example of a collaborative effort across the futures industry.

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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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