China’s Options Markets Go Wild; Day Traders Are Back, Playing With Options

May 13, 2019

Observations & Insight

The Spread – Wake Up Call
Twitter risk reared its head yet again. In this episode, we take a look at the impact President Trump’s tariff tweets have had on markets.
Watch the video and see the stories referenced here »

****SD: Per OCC, Friday’s index put/call ratio was 1.5, while the equity put/call ratio was 1.06. Friday’s cleared contract total was 24,194,739.

Lead Stories

China’s Options Markets Go Wild as Trade Tensions Flare Up
Bloomberg News (SUBSCRIPTION)
Open interest in China 50 ETF call options surged to a record; High volumes to stay as trade deal remains uncertain: XuFunds
Chinese traders are running for cover in the options market as renewed trade tensions with the U.S. trigger volatility in stocks and the yuan.

The Day Traders Are Back, Now Playing With Options; Compared with buying stocks, the fees and risk for individual investors are considerably higher
Lisa Beilfuss and Gunjan Banerji – WSJ (SUBSCRIPTION)
Martin Rogers has been regularly trading options from his mobile phone since last summer, after dabbling in stocks and derivatives for years. A pharmaceutical representative based in Winter Garden, Fla., Mr. Rogers is often on the road and has been drawn to the ease of trading between meetings and the possibility of high returns.

****SD: Last lines of the story: “Mr. Edwards, the law professor, likens the rising participation in options to the run-up to the tech-bubble bust, when online trading became ubiquitous and brought Wall Street to Main Street. Then, many first-time investors flocked to E*Trade and other electronic brokers, chasing internet and biotechnology stocks higher until those companies went bust. ‘This feels familiar,’ he said.”

Volatility in Stocks Could Unravel Bets on Calm Markets; Computer-driven funds amassed big equity positions while markets were sleepy
Trading on Tranquility
Michael Wursthorn and Akane Otani – WSJ (SUBSCRIPTION)
Recent swings in the stock market are threatening to unravel multibillion-dollar bets that rely on calm markets, potentially adding to investors’ jitters over the past week.

Oil Options Traders Eye Price Spike as Political Risks Swirl
Alex Longley – Bloomberg
Trading of $90, $100 and $110 calls swelled in recent sessions; Iran, Venezuela, Libya, Nigeria all present political risks
Whether it’s the U.S. sending military warnings to Iran or tensions in Venezuela, some oil traders have started to gear up for a possible price surge as political risks escalate.
Trading in relatively cheap option contracts that would profit from crude soaring to as much as $110 a barrel has taken off in the past two weeks. In total, the equivalent of more than 45 million barrels of $90, $100 and $110 calls, have traded in the last 9 sessions.

****SD: Missed this at the end of last week.

Commodity Risks: Describing the Unobservable
Blue Putnam, CME Group – JPMorgan Center for Commodities at the University of Colorado Denver Business School
We have observed in studying commodity markets that 100-year floods occur quite often, even multiple times a decade, so we know simple risk models can be inadequate and misleading. The challenge is that expected risk-return probability distributions cannot be directly observed. Some analysts lean heavily on examining the implied volatilities from options prices. Unfortunately, the implied volatilities all too often underestimate what is happening in the extremes of the distribution where the high impact risks are located.

****SD: From the piece: “If market participants fear the possibility of price breaks or gaps, options prices will reflect this risk and the result is a higher calculated implied volatility. But it will not be easily apparent that the implied volatility is reflecting price gap risk instead of an upward shift in the volatility regime. And, price gap risk is not the same risk as volatility regime shift risk.” Also, when’s the last time you saw the Russian mathematician Pafnuty Lvovich Chebyshev (1821-1894) referenced in derivatives literature? That necessitated a Wikipedia trip for me. But hey, now I know about the father of Russian mathematics.

Exchanges and Clearing

Norway clears way for Euronext to secure Oslo Bors in Nasdaq battle
Euronext won approval from Norway’s Ministry of Finance to buy up to 100% of Oslo Bors on Monday, effectively ending a five-month battle with Nasdaq for one of the last independent stock market operators in Europe.

P S Reddy takes charge as MD and CEO of Multi Commodity Exchange
Business Standard News
P S Reddy (pictured) took charge as managing director and chief executive officer (MD & CEO) of the Multi Commodity Exchange (MCX) on Friday.

Eurex EnLight extended to all Eurex equity and equity index options
Eurex Exchange
…In May 2019 the proven concept has been taken to the next stage, extending the product suite by adding all equity and equity index options and corresponding futures available at Eurex Exchange.

Eurex Fixed Income News May
April saw a continuation of the global equity markets rally against a backdrop of positive economic data from the U.S. and China, the pricing-in of a near-term resolution to U.S.-China trade negotiations and the release of positive European growth and inflation data after a difficult start to the year.


BC Partners Sells Majority Stake In Acuris To ION Investment Group
Funds advised by BC Partners (“BC Partners”) announced the sale of a majority stake in Acuris, a global provider of proprietary financial intelligence, data and analytics, to ION Investment Group (“ION”). ION will acquire a controlling stake in the company from BC Partners and GIC, Singapore’s sovereign wealth fund. BC Partners and Acuris management are reinvesting and will retain minority ownership.

****SD: Just including this as it caps a busy period for ION – three deals in two months.


Backtest Basics: How to set up the Wheel strategy
The Wheel is when one of your short puts or short calls finishes in the money. After you get “put stock” or get stock “called from you” and you start a new strategy based on the long stock or short stock position. For more general options instruction, go to The Options Industry Council site here.

List of Currency ETFs and ETNs with Options Traded
Currency exchange-traded funds (ETFs) and exchange-traded notes (ETNs) with listed US options can help investors manage their global currency exposures.

Almost time for investors to take ‘major defensive action,’ fund manager warns
Shawn Langlois – MarketWatch
All this trade-war business is making for some serious market jitters.
While Friday’s session delivered a nice little breather from all the selling, the Nasdaq Composite and S&P 500 still closed with their worst weekly decline of the year. The Dow Jones Industrial Average posted its worst week since March.
And it’s starting to look ugly again.

China-U.S. Feud Fuels Haven Demand as Traders Rewrite Playbook
Michael P. Regan, Emily Barrett and Vivien Lou Chen – Bloomberg via Yahoo Finance
Forget all the optimism that briefly reverberated through markets over trade on Friday. The weekend’s events have reshuffled the deck and traders are once again looking toward haven assets.

JPMorgan Warns on Stocks in Trade War Fear
Justina Lee – Bloomberg (SUBSCRIPTION)
As trade tremors reverberate, a bullish stock mantra just got trashed by JPMorgan Chase & Co.
Retail money, hedge funds and quants have ramped up exposures to equities with echoes of last year’s peak — raising the risk fund managers of all stripes will beat a retreat as volatility awakens, according to strategists at the U.S. bank.

Wall Street Picks the Next Domino to Fall in Trade-War Rout
Luke Kawa – Bloomberg (SUBSCRIPTION)
Analysts turn bearish on junk-bond exchange-traded fund; Betting against ETF is a cheaper way to wager than stocks
Wall Street analysts have picked the next domino that they think will fall in financial markets as an escalation of the trade war continues to upend global equities.

Here Are The 4 Drivers Of The ‘Local Vol. Ceiling’
Heisenberg Report
It’s been a wild-ish week – but that’s not saying a whole lot in 2019.
Central banks’ coordinated dovish pivot (spearheaded by the Fed’s “epic” relent and then iterated via the ECB’s announcement of new TLTROs, Japan’s forward guidance enhancement, the RBA’s pivot to neutral, the RBNZ’s eventual capitulatory cut, the Riksbank’s throwing of the towel, etc.) helped crush cross-asset vol., ushered back in “carry mania” and reinvigorated the global hunt for yield.

VXX: Sell The Spike
Damon Verial – Seeking Alpha
With volatility spiking and the VIX volatility index entering backwardation, I was recently asked whether it’s a good time to buy volatility via the iPath Series B VIX Short-term Futures ETN (VXX). Obviously, VXX is back to its March levels now. Some are saying it’s overbought, while others are saying it’s just beginning to rise.


As World Awaits Chinese Revenge, Analyst Trade-War Bets Scatter
Michelle Jamrisko – Bloomberg (SUBSCRIPTION)
As investors remain on edge in anticipation of Chinese retaliation for last week’s U.S. ramp-up in the trade war, economists and market strategists are scattered in their predictions for the path ahead.

Double-Digit Growth Continues for Index Industry
David Tabaka, Burton-Taylor – TABB Forum
Global index revenue increased 13.4% in 2018, reaching a record $3.5 billion. Amid the double-digit industry growth, the proliferation of passive investing products is creating an environment for incumbent and emerging providers alike to compete for market share.

****SD: And some of that money comes from proprietary deals with derivatives exchanges.

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