JLN Options: Cost of ‘tail risk’ protection to soar

Feb 9, 2012


Cost of ‘tail risk’ protection to soar
By Telis Demos and Michael Mackenzie in New York, The Financial Times
Not so long ago, the idea of “tail risk” was alien to many investors. Now, bruised by the 2008-09 financial crisis, fund managers pay to insure their portfolios against market meltdown. And tough, new regulations mean that the cost of that protection could soon soar.
Investors have learnt the hard way about being ill-prepared for extreme events, be it the subprime disaster, political turmoil in the Middle East or eurozone debt crisis. Demand for buying long-dated options and other complex products, such as 10-year variance swaps that compensate for an unexpected future calamity, has grown as a result. The cost of “tail hedging” has retreated from last year’s peak, when anxiety over the eurozone was at its highest, yet premiums remain elevated and investors are worried they could soon climb again.
The fear is that higher capital requirements for banks and the proposed Volcker Rule, which would prohibit banks from engaging in proprietary trading, will limit the ability of Wall Street dealers to support protection against risk and reduce liquidity in products such as variance swaps.

Eurex to Roll Out New Trading System
Tom Steinert-Threlkeld, Securities Technology Monitor
Eurex said it will move to an entirely new trading system, starting in December.
The derivatives marketplace owned by Deutsche Boerse Group will take on a trading architecture developed at sister firm International Securities Exchange.
With the new trading system, Eurex will cease to use the its MISS infrastructure and VALUES API interface.
The replacement interfaces will be based upon industry standards such as FIX and FAST protocols. Eurex said there will be a “ high degree of backward compatibility for the new interfaces allowing participants to leave their trading applications unchanged in future releases of the new trading system.’’
The new system features a messaging architecture designed for “minimum latency.” Tools for implementing different strategies and spread trading will also be delivered.

Traders Bet VIX Won’t Snooze Forever
By Chris Dieterich, The Wall Street Journal
The rally in U.S. stocks has crushed volatility and tamed the market’s fear gauge, but traders are piling into bets that the next VIX move will be higher.
Over the last three weeks, options traders ramped up the number of bets that profit should the Chicago Board Options Exchange Volatility Index, or VIX, rise from its seven-month lows. The number of VIX call options in the market, or open interest, is the highest since August, when a downgrade to U.S. credit collided with euro-zone debt concerns and touched off four months of wildly choppy stock trading, Trade Alert data showed.


CBOE’s Fourth-Quarter Profit Up 1.4%
CHICAGO—CBOE Holdings Inc.’s fourth-quarter profit edged up 1.4% amid weaker margins and quieter trading volume, although earnings still topped expectations.
Less volatile markets in the fourth quarter put pressure on CBOE’s bread-and-butter stock-options trading in the final few months of the year. For the fourth quarter, CBOE’s total trading volume totaled 270.9 million contracts, down slightly from volume of 272.8 million contracts recorded a year ago.
William Brodsky, chairman and chief executive of the Chicago Board Options Exchange parent, said on a conference call with analysts that there was “slower-than-usual trading in November and December,” but characterized this as a “natural pause” after a period of soaring volatility and trading volumes.

CBOE Holdings, Inc. Reports Solid Fourth Quarter And Record Full-Year 2011 Financial Results
Fourth Quarter Financial Highlights
— Adjusted Operating Revenues Increase 6 Percent to $120.2 Million(1)
— Adjusted Net Income Allocated to Common Stockholders Increases 10 Percent to $33.2 Million(1); Adjusted Diluted EPS Up 19 Percent to $0.37(1)
— GAAP Net Income Allocated to Common Stockholders Increases 2 Percent to $31.3 Million; Diluted EPS Up 13 Percent to $0.35 Compared to $0.31 in Prior Year

BATS Exchange Announces Innovative Primary Listings Pricing, Including Free Listings
BATS Global Markets Press Release
KANSAS CITY, Mo., Feb. 9, 2012 /PRNewswire/ — BATS Global Markets, a global operator of stock and options markets, today unveiled a unique flat pricing model for its primary listings business, including free listings for companies whose stock or exchange traded product (ETP) trades more than 2 million shares per day.

Price war beckons as F&O volumes spurt on BSE
Low transaction cost, incentives & change in expiry cycle add to record rise
Palak Shah / Mumbai Feb 10, 2012
The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) may witness another round of price war, as derivative volumes are picking up on the former’s platform.
The BSE has witnessed high trading interest in the options contract of the Sensex, its benchmark index, pitched against NSE’s popular Nifty index. This is due to a 99 per cent lower transaction cost in BSE’s options segment, coupled with incentives and a change in the derivative expiry cycle from the current month.


Waiting for a catalyst
Lindo Xulu, Financial Mail, Johannesburg
In the first week of January, 800 contracts were traded on the Safex commodity derivatives market.
However, if the critics are correct it’s unlikely the interest will be sustained unless some of the drawbacks of the product fall away.
Owning an options contract gives an investor the option (but not the obligation) to buy or sell an asset at a certain price in future. On the other hand owning a futures contract provides an investor with the obligation to buy or sell a specific asset and the seller to deliver that asset at a specified future date.
Unlike platinum futures, which have been welcomed by the investment community, platinum options are not that well known and the market is not liquid.


As Markets Lurch, Options to Avoid Getting Seasick
WHEN it came to stock market volatility, 2011 was pretty close to the mother of all roller-coaster rides.
The Standard & Poor’s 500-stock index had several daily swings of 2 percent or more in August alone. The Dow Jones industrial average seesawed more than 400 points for four straight days that month. With the sturm und drang of European and American debt woes continuing, we may see more bipolar market oscillations.
The investment climate — even among wealthy investors — has cooled toward stocks that have full exposure to the market’s ups and downs. A recent survey by the Spectrem Group found that “while somewhat more moderate in risk tolerance than in 2009, investors remain more interested in protecting principal than growing their assets.”
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CBOE Special Feature: SPXPM vs. SPY Options
By Jill Malandrino
Russell Rhoads is an instructor with The Options Institute at the Chicago Board Options Exchange. He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In 2008 he wrote Candlestick Charting For Dummies and is the author of Option Spread Trading: A Comprehensive Guide to Strategies and Tactics. Russell also wrote Trading VIX Derivatives: Trading and Hedging Strategies using VIX Futures, Options and Exchange-Traded Notes. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois – Chicago and acts as an instructor for the Options Industry Council.
Russell: In October of 2011, CBOE’s all electronic C2 Options Exchange began trading in index options based on the S&P 500®. The Chicago Board Options Exchange (CBOE) has been the venue for trading SPX options since the early 1980s, but those options are traded in an open outcry format.


NYSE Euronext to Host Investor Day on Monday, Apr. 2, 2012
NEW YORK, Feb 09, 2012 (BUSINESS WIRE) — NYSE Euronext (NYX) will host an investor day for the professional investment community on Monday, April 2, 2012, at the New York Stock Exchange, 11 Wall Street, New York, NY. The day’s schedule will commence with opening remarks at 1:00 p.m. and is expected to conclude at approximately 5:00 p.m.
Presenters at this conference will include Duncan L. Niederauer, Chief Executive Officer, NYSE Euronext and other members of the company’s executive management team.

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