‘Crazy’ Bets on $200 Oil Invade the Options Market

Oct 18, 2021

Observations & Insight

The FIA reported late Friday that global exchange-traded derivatives volume and open interest both posted their highest levels on record in September. A total of 5.6 billion futures and options traded last month, with options volume once again exceeding futures. The September futures and options volume total was up 33% from the same period a year ago. The FIA said 3.1 billion options changed hands, compared with 2.5 billion futures. Year-to-date, total volume for 2021 was 44.7 billion contracts, up 32.7% from the first nine months of 2020, the FIA said. Not surprisingly, equity index and individual equity contracts have fueled this year’s gain.~SC


Stock Rally Resumes Despite Mixed Bag of Data; John’s Take Dives Into FIA Tech’s Atlantis; Covered Calls Unmasked – The Spread – October 15, 2021

– Equity options volatility ebbs as markets resume rally, fixated on upbeat earnings;
– John’s Take looks at FIA Tech’s expanded Atlantis service for options brokers;
– Why use Covered Calls? The options Term of the Week with Jermal Chandler.

Watch the video »

Lead Stories

‘Crazy’ Bets on $200 Oil Invade the Options Market; Traders are wagering U.S. crude’s rally to a seven-year high is just the beginning, despite a softening global economic expansion
Gunjan Banerji – WSJ
A roaring trade in bullish crude-oil options says the 2021 energy rally is far from over. Traders once again are betting that the U.S. oil benchmark will surge above $100 a barrel, from a recent $82, as early as December. U.S. crude, known as West Texas Intermediate or WTI, is up 10% this month, and 70% this year, but it hasn’t hit $100 since the oil crash of 2014.

Brace for market volatility if the Fed pulls back on stimulus and the liquidity wave breaks, El-Erian says
Natasha Dailey – Markets Insider
Mohamed El-Erian said investors should brace for market volatility and worsening shortages as the holidays approach.
The economist and chief economic advisor for Allianz told Fox News’ Chris Wallace that the “wonderful world” of low volatility may come to a halt.

Energy and commods hedge funds post big gains as prices skyrocket
Maiya Keidan and Julia Payne – Reuters
Hedge funds that bet on a big comeback for commodities enjoyed soaring returns in the first nine months of 2021 as the world faced an energy crunch.

Barclays Trading Boss Saw the $6 Billion London Whale Coming
Stefania Spezzati – Bloomberg
As an example of why investment banks should listen to their risk managers, C.S. Venkatakrishnan’s experience at JPMorgan Chase & Co. is hard to top. Back in March 2012, just weeks into a senior risk job at the Wall Street giant, his team flagged the potential for $6.3 billion of losses from a murky derivatives trade in London.
The analysis was dismissed as “garbage” by the risk officer at the JPMorgan department responsible for the trades. But Venkat, as he’s known to colleagues, proved remarkably prescient. The trading strategy exploded spectacularly, giving rise to a $6.2 billion loss and the legend of the London Whale, the nickname for the banker who made bigger and bigger bets to try to cover his positions. A U.S. Senate investigation said some losses would have been avoided if the Whale’s unit had heeded Venkat’s warning.

Bitcoin extends climb above $60,000 threshold on imminent ETF approval
Isabelle Lee – Markets Insider
Bitcoin is extending its recent ascent to test a new price record as crypto “hodlers” cheer a futures exchange-traded fund that will start trading this week.
The world’s largest digital asset by market capitalization rose as much as 5.5% on Monday to trade at $62,667, according to Bloomberg data. Bitcoin pared gains to $61,094 as of 8:20 a.m. ET. The price slipped over the weekend to around $59,000 after scaling the $60,000-level on Friday.

China Opens Stock, Commodity Derivatives to Foreign Investors
Bloomberg News
China’s regulator expanded the investment scope for foreign investors, adding key commodity and stock market derivatives in the latest move to open its financial markets even as Beijing’s crackdown on a broad section of its private sector has roiled markets.

Is the army of lockdown traders here to stay?
Joshua Oliver in London and Madison Darbyshire – Financial Times
Kristine Licuanan lasted less than 24 hours as a day trader.
Locked down in London, the 37-year-old in January snapped up GBP200 of shares in video game retailer GameStop and cinema chain AMC, unloved stocks catapulted to record highs in a frenzy of speculative buying that convulsed the US stock market earlier this year.
“I couldn’t stomach the volatility,” said Licuanan, recalling the stress of checking her phone to track where the shares were trading, before selling them at a loss only hours after buying them.


Challenges, successes, new methodologies and products – what’s happening on Eurex EURO STOXX 50 ESG Index Futures and Options?
The launch of a new product is always a good opportunity to look back at a product family as a whole. Christine Heyde, Equity & Index Product Design at Eurex joined us to assess the development of the EURO STOXX 5O ESG Index Futures and Options in light of the introduction of its weekly and month-end option expiries.

Regulation & Enforcement

Exotic World of ESG Derivatives Triggers Warning From Regulator
Greg Ritchie and John Ainger – Bloomberg
As some of the world’s biggest banks start experimenting with complex ESG derivatives, Europe’s markets regulator says it’s time to impose new rules to protect investors from greenwashing.
The European Securities and Markets Authority says it’s hard to verify the positive impact of derivatives sold under environmental, social and governance labels. The watchdog says standardized criteria should be met before firms can add ESG tags to products such as forwards, options and swaps.

Broker-Dealer Settles NYSE American Charges for Order Routing Recordkeeping Violations
A broker-dealer settled NYSE American LLC (“NYSE American”) charges for (i) failing to keep accurate records of the firm’s customer orders that were routed to the NYSE American Options floor, and (ii) related supervisory violations.
In a Letter of Acceptance, Waiver and Consent, NYSE American found that the broker-dealer did not maintain accurate order memoranda that included the price and transmission times. NYSE American determined that the broker-dealer’s reported electronic transmission times were often later than the times entered by NYSE American floor brokers. NYSE American also found that the broker-dealer “routinely” recorded the prices of manually received institutional customer options orders inaccurately.


Here’s when soaring oil prices could make the stock market sputter
William Watts – MarketWatch
Surging oil prices might account for some of the stock market’s sideways performance since early September, according to one Wall Street analyst, with crude knocking on the door of a level that traditionally starts to bite into economic activity.
In a Sunday note, Julian Emanuel, chief equity and derivatives strategist at BTIG, took a look at deviations from the 24-month moving average for front-month West Texas Intermediate crude futures. He noted that the top 5% of observations, which occur when the price is 57% above the 24-month-moving average, have occurred ahead of an economic slowdown.

For Options Traders, Earnings Season Presents Opportunities
Russell Rhoads, CFA – Nasdaq
For option traders earnings season is a great time to take advantage of quick shifts in expected volatility and potential outlier price moves from stocks. These outlier moves may be higher or lower, depending on investor expectations relative to the actual earnings release. Between October 20 and November 8, eight of the top ten components of the Nasdaq-100 report earnings with six large firms reporting the week that ends on October 29. The table below lists the eight companies reporting over the next three weeks along with their respective price reactions to earnings over the last two years.


Personal Finance: 60/40 Isn’t Dead, It’s Just More Expensive
Allison Schrager – Bloomberg
Volatile, pandemic-riven markets for stocks and bonds has Wall Street ready — again — to declare the traditional 60/40 portfolio split a dead strategy. The prospect of a low-growth, high-inflation economy (stagflation) dims the prospects of both investment categories, and certainly demands a rethink of where to stash your savings.
The big banks already are offering advice on alternatives; I’ve got some of my own. But for investors seeking robust-but-safe returns, there’s really just one option: be prepared to take on more risk.

These are the 10 most talked about stocks on Reddit’s WallStreetBets
Matthew Fox – Markets Insider
Following which stocks Reddit’s WallStreetBets crowd is talking about this year has paid off, as several have gone through epic rallies and seen heightened volatility.
From GameStop in January to AMC Entertainment in June, the 11 million-member forum has driven the conversation in so-called meme stocks that have exploded higher amid overwhelming demand from retail investors. Strong demand for stocks with shaky fundamentals has led to several hedge fund blowups that were caught on the opposite side of the trade betting against the company in question.


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