Ebbing Volatility Fuels Rush for Bullish Options

Oct 30, 2019

Observations & Insight

Opening Remarks of FIA President and CEO Walt Lukken
Welcome to the 35th Annual Futures and Options Expo. Or as my wife calls it, the “Week My Freakin’ Husband Skipped Halloween.” Or as Emma Davey calls it, the “Week Britain Almost Lost its Freakin’ Mind.”

FIA is pleased to be back in Chicago once again—the birthplace of the modern derivatives industry. While FIA does events all around the world from London to Laguna Beach, from Singapore to Frankfurt to Boca and beyond, this week always feels like coming home for us.

As we gather today, there is uncertainty all around us.

I think it is fair to say that we are experiencing the highest level of political uncertainty in the last 50 years. Whether it’s the heightened political tensions in the US, the fears around Brexit, or the unrest in Hong Kong, there appears to be growing anxiety around the world.
Read more http://bit.ly/2Wq7r6B

Lead Stories

Ebbing Volatility Fuels Rush for Bullish Options
Gunjan Banerji – WSJ
The recent lurch higher in the stock market has pushed volatility lower and spurred a chase for bullish options bets on the S&P 500.
Measures of volatility from stocks to bonds have fallen lately as the S&P 500 touched a fresh high this week. The Cboe Volatility Index, or VIX, recently hit the lowest level since July and has fallen about 17% this month. A measure of bond volatility has also receded, while gauges tracking swings in commodities and currencies via the Cboe/CME FX Yen Volatility Index and Cboe Crude Oil ETF Volatility Index have fallen.

Sterling drifts as big options reduce volatility
Elizabeth Howcroft – Reuters
Sterling edged higher on Wednesday after British Prime Minister Boris Johnson won parliamentary approval to hold a general election in December, though moves were limited as large currency options expiring this week curbed volatility.
More than $2 billion worth of options with a strike price of around $1.29 and billions more between $1.24 to $1.32 are expiring on Oct. 31, an original Brexit deadline, according to Refinitiv data.

Cash-Market Volatility Adds to Worries Facing Libor Replacement
Daniel Kruger and Vipal Monga – WSJ
Turmoil in short-term money markets has rattled a protracted effort to phase in a new borrowing benchmark meant to eventually underpin trillions of dollars in lending contracts.
Issuance of floating-rate debt linked to the secured overnight financing rate, or SOFR, has slipped to $24.5 billion this month as of Oct. 28, according to TD Securities USA. That’s down from $43.4 billion in September and $56.1 billion in August. The pullback comes after September’s turmoil in short-term cash markets prompted the Federal Reserve to intervene, renewing questions about whether SOFR will be ready to replace its predecessor by 2021.


CME Group profit beats on strong trading volumes
Bharath Manjesh – Reuters
Exchange operator CME Group’s (CME.O) third-quarter profit topped Wall Street estimates on Wednesday, as increased market volatility lifted trading volumes and boosted transaction fees.
A protracted U.S.-China trade spat and fears of an economic downturn kept volatility high in the third quarter, benefiting exchange operators like CME who make a bulk of their money from clearing and settling trades.

Eurex expands strategic relationship with MSCI
Eurex Exchange
Eurex and MSCI have signed an agreement on the long-term extension of their strategic relationship. In addition to the long-term extension of the license agreement on futures and options, MSCI will license new indexes to Eurex for listed ESG equity index derivatives and Total Return Futures (TRF).
The successful MSCI index-linked product offering at Eurex will be expanded in the coming months to include ESG equity index derivatives. This will serve the strongly growing demand for sustainable investments and the trend towards listed and centrally cleared contracts. The MSCI index-based TRF offering will further strengthen Eurex’s position as the leading exchange in the futurization of Total Return Swaps.

Regulation & Enforcement

Derivatives Market Watchdog Promises Movement on Long-Stalled Measures
Dave Michaels – WSJ
The Trump administration’s pick to oversee the nation’s derivatives markets plans to take a more industry-friendly approach than some of his Democratic predecessors and wrap up unfinished business.
Heath Tarbert began a five-year term when he took over the Commodity Futures Trading Commission in July. In an interview, he said he is looking for opportunities to make changes “that we can actually get done in a relatively short period of time.” Among his priorities: Putting in place long-delayed limits on speculation in energy and precious metals.

CAT Resurrects the Age-Old Question ‘Build vs. Buy?’
Alex Rabaev – TABB Forum
The Consolidated Audit Trail is perhaps the most ambitious regulatory system ever implemented, and compliance will require complex reporting solutions. Is it better to build in-house or buy from a regtech vendor?

Keep Libor, FCA — it’s a benchmark fit for purpose
Dr Oonagh McDonald – Financial Times
The Financial Conduct Authority should not call time on Libor (the London interbank offered rate), the most famous number in the world. The UK and US have struggled to provide a benchmark, a term rate with a yield curve. So far they have only come up with Sonia (the effective sterling overnight interbank average rate, established in 1997), an almost risk-free interest-rate benchmark. The US produced Sofr (the secured overnight financing rate), a risk-free rate, based on daily transactions in the US Treasury repurchase market.


Trading Technologies to Launch Connectivity to the Mexican Derivatives Exchange Via the TT Platform
Trading Technologies
Trading Technologies International, Inc. (TT), a global provider of high-performance professional trading software, infrastructure and data solutions, and the Mexican Derivatives Exchange (MexDer), a subsidiary of the Mexican Stock Exchange (Bolsa Mexicana de Valores), one of the largest stock exchanges in Latin America, today announced that all derivative products listed on MexDer will be available globally to all users of the TT platform in Q4 2019.
Trading Technologies’ clients will be able to leverage TT’s full suite of tools, which includes functionality for charting and analytics, mobile trading, options, FIX services and API development, to trade all derivatives listed on MexDer. This includes the widely followed futures and options contracts on the S&P/BMV IPC Mexican Equity Index, MXN/USD FX and Mexican Government Bond.

TP ICAP signs multi-year data deal with Refinitiv
Hayley McDowell – The Trade
Interdealer broker TP ICAP has signed a multi-year deal with Refinitiv to expand its integrated global data across equities, fixed income, FX, derivatives and commodities.
In a statement, Refinitiv said that it is working with TP ICAP to meet its need for data to power the broker’s applications on the Refinitiv data platform and on the Eikon desktop. It will also analyse business priorities with TP ICAP to uncover and target potential new opportunities.


Here’s How to Hedge If Fed Disappoints Stocks, BofAML Says
Joanna Ossinger – Bloomberg
Credit hedges and bearish bets on U.S. stocks are some of the trades worth considering if the Federal Reserve disappoints equity markets, according to Bank of America Merrill Lynch.
Low volatility across a range of asset classes signals investors may be underpricing risks, with the majority of traders expecting the Fed to lower its key rate on Wednesday, BofA equity-derivatives analysts including Gonzalo Asis and Nitin Saksena said. They recommend owning short-dated protection, in particular, suggesting bearish bets on the iShares iBoxx High-Yield Corporate Bond exchange-traded fund.

Here’s how the stock market tends to perform after the Fed cuts interest rates 3 times in a row
Mark DeCambre – MarketWatch
Wall Street is bracing for what seems almost assuredly to be a third interest rate cut in as many meetings of the Federal Reserve on Wednesday afternoon.
And although there may be some trepidation about policy makers delivering another dose of monetary easing to a stock market that is at or near records, history shows that the market tends to extend its gains after three successive interest-rate cuts of a quarter percentage point, according to data from LPL Financial (see chart below).


Why ‘easy money’ years for the stock market are becoming increasingly rare
William Watts – MarketWatch
It isn’t just you. The stock market has become more volatile over the years, according to a new method for measuring its gyrations, and that’s making life more of a challenge for investors as they attempt to navigate the ups and downs.
In a Tuesday note, DataTrek Research co-founder Nicholas Colas highlighted a volatility measure that starts with daily returns on the S&P 500 SPX for any given year and adds them up, but turns the negative days into a positive sign.

Obama Will Kill Stock Market. No, Trump Will. No, Warren Will
Sarah Ponczek and Vildana Hajric – Bloomberg
Wall Street’s best minds are falling over themselves to describe the cataclysms that would befall equities should Elizabeth Warren get elected. It’s a brand of analysis whose recent track record is abysmal.
The S&P 500 will plunge 25% if the Democrat becomes president, says Paul Tudor Jones, the hedge fund manager. Discovery Capital Management founder Rob Citrone says she’s “the single biggest risk for the market” and calculates the downside at up to 20%. Billionaire Leon Cooperman told CNBC earlier this month that the market would drop 25% if Warren or Bernie Sanders win.

****JB: Something, something, the sky is falling.

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