Cboe Chief Flags ‘Unprecedented’ Early Hedging of U.S. Election; How the Euro Could Defy Analysts and Options Market Ahead of Fed

Jan 24, 2020

Lead Stories

Cboe Chief Flags ‘Unprecedented’ Early Hedging of U.S. Election
Luke Kawa and Lananh Nguyen – Bloomberg
In 30 years at the premier U.S. options exchange, Ed Tilly has never seen an election sow more anxiety than the 2020 presidential race.
The chief executive officer of Cboe Global Markets Inc. made the observation at a luncheon in New York on Thursday. Tilly highlighted elevated demand for protection around important dates in the primary campaign and general vote showing up in the term structure of implied volatility.

****JB: It is interesting how most people consider Trump’s win in 2016 a big surprise. If you looked at the polling (to be fair some polls were not good) Trump’s chances were low but hardly beyond reason. Nate Silver, the founder and editor in chief of FiveThirtyEight and its chief prognosticator, gave Trump a 29% chance. Not great odds but not terrible by any means. If you had a six sided die with only 1, 2 and 3 on each face (so two of each) you would not be shocked if you rolled a “1” which is close to the same odds as Trump had. As Silver notes in the linked article, “Given the historical accuracy of polling and where each candidate’s support was distributed, the polls showed a race that was both fairly close and highly uncertain.” And, remember, Clinton actually did get more votes, so the predicted “more likely” win happened. It was just not sufficient for the actual win.

How the Euro Could Defy Analysts and Options Market Ahead of Fed
Vassilis Karamanis – Bloomberg
Euro bulls may be looking at a longer wait before they can break free, with a compelling case that the shared currency may head lower into next week’s Federal Reserve monetary policy decision. It comes in defiance of consensus views among analysts for the euro to rebound, an expectation also reflected by current pricing in the options market. The common currency slipped to a seven-week low of $1.1026 on Friday, at a time when the median estimate of analysts in a Bloomberg survey calls for a move to $1.1400 by end-June and sentiment through options remains bullish for the common currency. That’s turned the currency’s charts bearish in the short-term and may leave long positions looking exposed.

Pound Watchers Signal That Only the BOE Can Shift the Market
Vassilis Karamanis and Michael Hunter – Bloomberg
After two years of bearishness in pound options, traders are turning neutral over the currency’s trajectory. Sterling fell after the release of better-than-expected U.K. data, failing to sustain a rally that sent the pound to its highest in more than two weeks. A gauge of market sentiment and positioning suggests investors see balanced risks for the currency over the coming three months. “It’s a waiting game now,” said Stephen Gallo, European head of foreign exchange strategy at BMO Capital Markets. “It’s unclear whether the Bank of England’s Monetary Policy Committee will think that enough easing has already been baked in by the January decline in pound rates, or that it will think this easing will need to be reinforced with a rate cut next week.”

Investors wonder if coronavirus will shatter extreme calm
Peter Wells – Financial Times
In February 2018, markets were struck by an outbreak of volatility that tore Wall Street down from record highs, prompting some to dub it a “virus.” Nearly two years later, and with US stocks again near a peak, investors are wondering whether an actual virus might bring back some more drama to markets.
Optimists may point to the relative resilience of the market’s “fear gauge”, the CBOE Volatility index — or the Vix — which reflects the cost of buying short-term options on the S&P 500. This year the index brushed off heightened tensions between the US and Iran. But the adverse effects of a global pandemic could have a bigger impact on one of the things that still manages to unsettle volatility indices — expectations of economic growth.

Priced for perfection, oil slides on fears coronavirus will hit demand: Kemp
Tassia Sipahutar and Ishika Mookerjee – Reuters
China’s outbreak of novel coronavirus has sent oil prices sharply lower as traders reassess whether the country will be able to generate the strong economic growth needed to rebalance the market in 2020.
China and its neighbour India accounted for more than half of all incremental oil consumption between 2013 and 2018 so the economic growth of these two giant Asian economies is critical to the oil market.

First Comes Futures, Then Comes The Bitcoin Options.
RCM Alternatives
The CME is on a rolllll, launching their second new product in recent months (right behind the micro E-mini). In their words “…..in response to interest in cryptocurrencies and customer demand for tools to manage bitcoin exposure, CME options on Bitcoin futures (BTC) are now trading.” Many would say you can’t really have a successful futures contract without options on those futures, and that’s exactly what the Bitcoin futures options are based on, the CME’s Bitcoin futures which launched November 2017.

Exchanges and Clearing

Cboe To Launch Equity Derivatives In Europe In 2021
Trader’s Magazine Editorial Staff
Cboe Europe aims to launch equity derivatives next year, once regulatory approvals are in place, according to David Howson, executive vice president at Cboe Global Markets and president of Cboe Europe. Howson said at a media briefing in London recently that the exchange plans to launch futures and options on equity indices, the majority of which are currently traded in Europe on Deutsche Börse’s Eurex. However, Howson noted that volumes of equity derivatives traded in Europe are only 8% of those in the US, so there is a large opportunity to grow the market.

Regulation & Enforcement

A proposal to amend Rule 4121(b) concerning the resumption of trading following a Level 3 market-wide circuit breaker halt.


Pricing American call options using the Black – Scholes equation with a nonlinear volatility function
Christoph Reisinger – Risk.net
In this paper, we investigate a nonlinear generalization of the Black – Scholes equation for pricing American-style call options, where the volatility term may depend on both the underlying asset price and the Gamma of the option. We propose a numerical method for pricing American-style call options that involves transforming the free boundary problem for a nonlinear Black – Scholes equation into the so-called Gamma variational inequality with a new variable depending on the Gamma of the option. We apply a modified projected successive over-relaxation method in order to construct an effective numerical scheme for discretization of the Gamma variational inequality. Finally, we present several computational examples of the nonlinear Black – Scholes equation for pricing American-style call options in the presence of variable transaction costs.


Don’t Count on an Economic Boom This Election Year
Randall W. Forsyth – Barron’s
The stock market has predicted nine of the past five recessions, according to the famous quip of economist Paul Samuelson. Surely, though, last year’s 29% gain in the S&P 500 index portends robust growth during 2020, doesn’t it?
Not necessarily, according to David Ranson, a familiar name to Barron’s readers, who heads HCWE & Co.—even though it would be consistent with the long-observed presidential cycle, in which the third year traditionally is the best of the four-year term for stocks, as Washington tries to stoke the economy ahead of the election campaign.

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