Dalio said those who insured against coronavirus fallout could be ‘annihilated’; How to Hedge a Coronavirus

Mar 4, 2020

Observations & Insight

A Reporter’s Story About the Boca Cancellation
By John Lothian

Last week I told the JLN staff I expected by Wednesday or Thursday this week that FIA would cancel the Boca conference. They looked surprised. It was still surprising today when word first circulated that the Futures Industry Association had cancelled the Boca conference.

Tuesday morning, while I was working on scheduling a video interview for the Boca conference, an email came back to me with the note that the interview was off as Boca was being cancelled. A quick call gave me details that could only come with a decision, not just a rumor. I got lucky.

To prepare for when the cancellation confirmation would come, I started writing the story JLN published Tuesday morning about the cancellation. The story was all ready, with help from Sarah Rudolph’s editing, but no amount of waiting mid-morning would seem to bring the announcement.

To read the rest of this commentary, go here.

Lead Stories

Dalio said those who insured against coronavirus fallout could be ‘annihilated’
Steve Goldstein – MarketWatch
The co-founder of the world’s biggest hedge fund last month said he was more concerned about the wealth gap than the spreading coronavirus.
Ray Dalio, the co-chief investment officer and co-chairman of Bridgewater Associates, is a bit more worried now.
In a Tuesday night post on LinkedIn, Dalio said insurers and those who sold deep-out-of-the-money options planning to earn the premiums could be annihilated.

How to Hedge a Coronavirus
Spencer Jakab – The Wall Street Journal
Imagine that an investor knew back in early December that a deadly coronavirus was spreading in Wuhan, China, that could become a pandemic. Or imagine that he at least heard and heeded the warning by the tragically muzzled Dr. Li Wenliang at the end of that month. Acting on that information by, say, shorting the highflying Nasdaq Composite might have sounded like a good idea, but the results would have been disastrous. By the time the index hit its intraday record on Feb. 19, a forewarned investor would have trailed that index by about 30 and 20 percentage points, respectively.

Trading in Firm Hunting a Virus Vaccine Dwarfs GE and Apple Combined
Bailey Lipschultz – Bloomberg
Investors are flipping shares of Inovio Pharmaceuticals Inc. more quickly than any other publicly-traded stock on Wednesday as retail investor enthusiasm grows surrounding the company’s hunt for a coronavirus vaccine. As of 10:54 a.m. in New York, more than 82 million shares of the Plymouth Meeting, Pennsylvania-based company had been traded, with call options that expire later this month being active as well. The company’s trading volume is more than double any other company and is higher than General Electric Co., Apple Inc., Ford Motor Co., and Microsoft Corp. combined, although the dollar value of shares traded in the larger companies still dwarfs Inovio.

Fed funds swaptions offer SOFR alternative
Ben St. Clair – Risk.net (subscription required)
A handful of US dollar swaptions referencing the federal funds rate have traded in recent weeks, as investors look to move away from derivatives with Libor as the underlying rate. The official alternative to US dollar Libor is the secured overnight financing rate, or SOFR, but liquidity in swaptions linked to SOFR is limited. Market participants say compounded fed funds offers similar rate exposure and allows users to test systems with a familiar overnight rate.

Bitcoin Options volume, Open Interest on Deribit surge to new heights
Biraajmaan Tamuly – AMB Crypto
The digital asset ecosystem has been losing sleep over the past 15 days after a bearish turnaround in mid-February contributed to a substantial dip in the prices of major crypto-assets. Coins such as Bitcoin, Ethereum, and Litecoin were significantly affected as their prices slumped below key resistances. However, taking a moment away from the current bearish trend, institutional investments in both BTC Futures and BTC Options recorded a fruitful period in February. Deribit has grabbed a foothold in the industry over the past year, with the exchange recording consistently high Options volume over the past 6 months.

Federal Reserve Cuts Rates, 10-Year Treasury Yield Tumbles, and Dow Swoons
Nicholas Jasinski – Barron’s
Stocks and bond yields tumbled on Tuesday, after the Federal Reserve lowered its benchmark interest rate by 0.5 percentage point, to a target range of 1.00% to 1.25%. The yield on the 10-year Treasury note briefly dropped below 1%, a record low. In a surprise move—which wasn’t necessarily much of a surprise—the Federal Open Market Committee cited the threat to the U.S. economy posed by the growing outbreak of a novel coronavirus around the world in its unanimous decision to cut rates.

Bill Ackman Is Preparing His Pershing Square Fund for a Coronavirus Meltdown
Carleton English – Barron’s
Coronavirus worries have hedge-fund manager Bill Ackman taking action.
In a release late Tuesday, Ackman said his firm, Pershing Square Capital Management, bought long notional hedges to limit losses in the fund’s portfolio amid coronavirus-spurred market volatility. The announcement came following a selloff spurred by the Federal Reserve’s decision to cut interest rates. Pershing Square began enacting this strategy 11 days ago, which was roughly when the market selloff began in earnest.

U.S. Fed’s emergency cut unleashes euro bulls
Richard Pace, Sujata Rao – Reuters
Investors have turned their most bullish on the euro since November 2016, with the Federal Reserve’s Tuesday interest rate encouraging some to price in further gains against the dollar. The Fed cut, two weeks before its official policy meeting, means it has taken the lead in fighting potential economic damage inflicted by the coronavirus outbreak and expectations of more cuts ahead are weighing heavy on the dollar. Those expectations are fuelling a rush into almost every other major currency, but especially those such as the euro whose central banks have little or no space for big rate cuts.

Message traffic skyrockets in U.S. equity options markets
Will Acworth – MarketVoice
The week ending Feb. 28 was exceptionally busy for U.S. equity options exchanges. Uncertainty about the impact of the coronavirus on the global economy triggered a large and rapid sell-off in the stock market, and the trading of options on equity indices and individual stocks exploded. According to the OCC, the central clearinghouse for the 16 U.S. exchanges that list equity options, more than 48.96 million options changed hands on Friday, Feb. 28, setting a record for total trading volume in a single day. Even more impressive was the number of order messages transmitted that week by market participants.

Exchanges and Clearing

HKEX to Introduce New Stock Option Classes
Hong Kong Exchanges and Clearing Limited (HKEX) is pleased to announce today (Wednesday) the launch of five new stock option classes on Monday, 23 March 2020.
Stock options trading volumes at HKEX have been very active this year, with average daily turnover of over 520,000 contracts, a 17.6 per cent increase compared with the average daily turnover in 2019.
HKEX is inviting applications for market makers for the new options.

MIAX Exchange Group Reports February 2020 Trading Results and New Records; Recognized for Most Innovative Technology for Second Year in a Row at Fund Technology and WSL Awards; Tom Jarck Joins Exchange Group as Volatility Products Specialist
Associated Press
Miami International Holdings, Inc. (MIH) today reported February 2020 trading results for its three fully electronic options exchanges – MIAX, MIAX PEARL and MIAX Emerald (together, the MIAX Exchange Group). The MIAX Exchange Group collectively executed over 55.4 million equity option contracts in February for a combined average daily volume (ADV) of 2,919,913 contracts, representing a total U.S. equity options market share of 10.92%, all of which were new monthly records. Additionally, the MIAX Exchange Group set new daily records for equity option contracts executed (5,199,080) and equity option market share (12.14%), while MIAX, MIAX PEARL and MIAX Emerald all set new individual exchange daily records for contracts executed (2,181,676; 2,780,300; and 257,830, respectively).

Regulation & Enforcement

SEC puts misleading fund names in its cross hairs
Jeff Benjamin – InvestmentNews.com
The Securities and Exchange Commission is seeking input from the public to help eliminate potentially misleading fund names that can ultimately harm investors. The SEC, which is responsible for approving the names, offered the issue out for public comment on Monday to determine if its current methods are effective or if viable alternatives are available for the agency to consider. When it comes to fund names that don’t quite jibe with the underlying portfolio management strategy, everyone seems to have an example. Proposed solutions, however, are less certain.


Matrix Executions Releases Next-Generation Routing Algo Rack
John D’Antona Jr. – Trader’s Magazine
Matrix Executions, LLC (“Matrix”), a broker-dealer specializing in trading workflow automation, announced today the update and expansion of its best-of-breed rack of order routing algos. With the focus on options, Matrix’s offering is now available on all major order management systems (OMS), and via Matrix’s two execution management systems (EMS), Matrix Pro and Matrix Elite.
The options algo suite’s modular design lets clients work with Matrix to build an infinite number of customized use case-based algos to meet their distinct liquidity needs. With this modular approach, firms can more quickly roll out advanced strategies. “Rarely are trading firms’ needs and relationships exactly similar, which is why we are focused on being able to configure options algos on a bespoke basis,” said Matrix COO Allen Greenberg. “To us, the importance of speed in trading also refers to time-to-market deployment of innovative ideas.”

High-Flying Trading App Robinhood Goes Down at the Wrong Time
Nathaniel Popper and Tara Siegel Bernard – The New York Times
Robinhood has become a Silicon Valley darling by presenting itself as a tech-savvy alternative to traditional stock trading platforms. But this week, with the financial markets in chaos, the start-up’s technology failed at the most crucial moment. On Monday and Tuesday, as global markets rebounded after a sell-off last week and then sank again, Robinhood’s trading platform went offline, leaving many customers to watch their portfolios drop in value without being able to do anything about them.


The Dow Is Soaring. It Probably Doesn’t Matter.
Ben Levisohn – Barron’s
The Dow Jones Industrial Average is up nearly 500 points in Wednesday morning trading, an abrupt turnaround following Tuesday’s nearly 800 point tumble. Just don’t get too excited. Yes, the stock market is staging a major rally. The Dow is up 490.26 points, or 1.9%, to 26,407.67, while the S&P 500 has gained 1.6% to 3051.61, and the Nasdaq Composite has risen 1.5% to 8811.06. And you’ll hear plenty of reasons about why the market is up as much as it is, ranging from Joe Biden’s strong showing in the Super Tuesday primaries to a delayed response to the Federal Reserve rate cut.

Did We Just Get Hit by a Black Swan?
Mark Hulbert – The Street
Was the stock market’s Covid-19 triggered plunge over the past few sessions a Black Swan event? This is more than just a matter of idle semantics. The question goes to the heart of understanding the role of risk in the stock market. Unfortunately, references to a Black Swan have become so ubiquitous that the phrase is in danger of losing its meaning. Many commentators are throwing the concept around with abandon to refer to anything that is unexpected. Some disingenuous advisers go further and use the concept as an excuse for why they (and their clients) lost money. In the process, we miss out on the insights that come from appreciating what a Black Swan really is.

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