JLN Options: Chaos Over a Plunging Note

Mar 29, 2012

Lead Stories

Chaos Over a Plunging Note
Complex Security Drops 60% in Value in Past Week; SEC Is on the Case
Regulators are examining volatile trading in a complex exchange-traded note that caused it to lose 60% of its value in the past week.
The Securities and Exchange Commission is looking into the VelocityShares 2x Long VIX Short Term Exchange note, managed by Credit Suisse Group AG, which had about $700 million in assets before the decline, according to people familiar with the matter. The SEC review is preliminary, the people said. The scrutiny comes amid rising investor alarm and confusion over trading in exchange-traded notes. The Credit Suisse note, which trades as TVIX and is designed to track stock-market volatility, plunged 29% on Thursday last week and then another 30% on Friday, even though market volatility was little changed. Another exchange-traded note, a Barclays Capital product designed to track natural gas, plunged this week for reasons that investors say remain unclear.

March 29, 2012: Index, ETF option volumes near midday Chris McKhann | optionmonster.com
Total options volume is closing in on 6 million contracts as calls are active in the Index and ETP options — especially commodity funds.

U.S. Stock Options With Biggest Changes in Implied Volatility
By Bloomberg News – Mar 29, 2012
The following are the U.S. stock options that had the biggest percentage changes in implied volatility from the previous trading day as of 11:30 a.m. in New York. This {OSCH } search was limited to options that are more than 10 days from expiration, have trading volume of at least 200 contracts and have strike prices within 5 percent of the underlying security’s price.


NASDAQ Welcomes CafePress Inc. to the NASDAQ Global Select Market(R)
NEW YORK, Mar 29, 2012 (GlobeNewswire via COMTEX) — The NASDAQ OMX Group, Inc. NDAQ -1.99% announced today that the trading of CafePress Inc. PRSS +0.21% commenced on the NASDAQ Global Select Market(R) on Thursday, March 29, 2012.

The biter bit – in little over a second
Financial Times (letter to the editor)
From Mr R.T. Leuchtkafer.
Sir, The BATS episode (“BATS bonus doubts after failed IPO”, March 27) is lush with ironies, not least because what Karl Marx once said is particularly apt here – that history repeats itself, first as tragedy and then as farce.
The tragedy was the May 6 2010 flash crash. The farce was on March 23 this year, when the BATS stock exchange saw its own stock price crash to less than a penny per share on the day of its initial public offering. BATS attributes the disaster to a software bug in its IPO auction process. The company should certainly be forgiven for that. BATS has an excellent and deserved reputation for high quality systems. Bugs can slip past even the most rigorous tests by the most diligent engineers.

Options on Futures

Analysis: What oil worry? Options market slumps despite Iran risk
By Jeffrey Kerr and David Sheppard, Reuters
If the oil options market is to be believed, the risk of an abrupt, dramatic move in crude prices has rarely been lower. Even as traders warn that a shock attack on Iran, a release of emergency oil reserves or a slowdown in Chinese growth could roil the market at any time, options prices suggest that demand for protection from such risks has fallen away. The Chicago Board Options Exchange’s Oil Volatility Index .OVX — a measure of fear or optimism in the market — has dropped more than a third this year to its lowest since the outbreak of fighting in Libya in February 2011, and is close to the weakest level since the launch of the index in 2007.


America’s capital markets: A muffled big bang
The JOBS Act and the BATS crash
The Economist
NEW YORK | from the print edition
THE capital market that is commonly thought to be the most developed in the world is, if you are being kind, in flux or, if you are not, in a mess. A stock-exchange blow-up has raised fresh questions about the reliability of America’s equities markets. More significantly, laws that govern how firms can raise money are on the verge of a profound revision.
First, the exchange snafu. A few years ago the temporary collapse of a trading venue in Lenexa, Kansas would not have been much noticed. Back then the Better Alternative Trading System (BATS) exchange was just a set of computer algorithms in the head of a man named Dave Cummings, who first computerised his own wheat-trading business and then expanded to accommodate equities.


Hedge Fund Trading Desks Are Just Window Dressing
By Phil Albinus, Advanced Trading
Thanks to algorithms, quants and high-frequency trading there’s no need to have a fleet of trading desks. Having traders stare at screens all day is just for pumping up the ego of the hedge fund owner, says George Michael of G2 Systems.
Advanced Trading: What’s been the biggest change in the role of the buy side trader?
George Michael: The trading desk on the buy side has become window dressing these days. They’re still there, still look the same, the traders still stare intently at the screen but it’s more about marketing and self esteem for the buy side manager.
Advanced Trading: When did this start to happen?
Michael: I saw this when I was working at Carlson Capital. There was definitely a point when I went to the chief investment officer and asked why do you have a trading desk? All your VWAP orders are being worked by the sell side firms and the algorithmic trading – moving a large block the algos will slice and dice the large trades. The old ways of doing the trades before algos was to get the trades done without moving the markets. Well, about 2002 and 2003 Credit Suisse First Boston introduced the first algorithm and they put the trading desks out of business. Three or four years later I asked why they still had a trading desk and were paying guys half a million a year to sit around and pick their noses.


A Comfort-Stock Strategy
By STEVEN M. SEARS, Barrons.com
Use put sales to cost-effectively ease into shares of quality stocks with decent dividends like GE and McDonald’s.
Investors are increasingly debating if the U.S. stock market is poised to decline after a strong advance or if it will build upon its historical year-to-date advance. Conversations invariably mention that the price of bearish puts, especially on the Standard & Poor’s 500 index, are increasingly expensive. As long as the debate rages, investors can consider using the fear of a decline to cost-effectively add positions to their investment portfolios.
Blue-chip stocks that pay reliable dividends are always in style.
But instead of just buying the stocks at the market price, consider selling puts on shares of dividend-paying solid names such as General Electric (ticker: GE), McDonald’s, (MCD), AT&
T (T), ExxonMobil (XOM), Procter & Gamble (PG), Intel (INTC), Microsoft (MSFT) and Pfizer (PFE).
 Options On UVXY And SVXY Open Up New VIX ETP Trading Approaches
Bill Luby, Seeking Alpha
Whether or not I find it useful to flog the wounded horse otherwise known as the VelocityShares Daily 2x VIX Short-Term ETN (TVIX), it seems as if investors and the media insist that the wild and crazy story of this +2x VIX futures ETN remain on the front page for now.
While the TVIX story is indeed a fascinating one, I fear it has crowded out a potentially more useful development from last week that has been criminally overlooked, the launch of options on two important VIX ETFs:
ProShares Ultra VIX Short-Term Futures ETF (UVXY)
ProShares Short VIX Short-Term Futures ETF (SVXY)

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