Fed to Reduce Bond Purchases in March; Trader Bet $65 Million in Options; Blockbuster Options Activity Recorded

Alex Perry’s Optionstopia 

Fed Moves Up Bond Taper, $65 Mln Option Bet & Blockbuster Options Activity in Alex Perry’s Optionstopia.

Options News Script

Hi, this is Alex with John Lothian News, and this is your recap of options news from the week. Here are some of this week’s top stories:

Fed Interest Rate Decision
https://www.wsj.com/articles/fed-officials-project-three-rate-rises-next-year-and-accelerate-wind-down-of-stimulus-11639594785?mod=hp_lead_pos1

https://www.marketwatch.com/story/what-the-fed-decision-means-for-your-wallet-and-your-credit-card-bill-11639595377

https://www.cnn.com/2021/12/15/economy/federal-reserve-powell-inflation-taper/index.html

https://www.cnbc.com/2021/12/15/follow-along-to-real-time-updates-of-the-big-fed-decision-and-powells-press-conference.html

Anticipation was high this week as traders awaited the decision of the Federal Reserve. On Wednesday, the central bank announced it would begin to reduce bond purchases by $30 billion a month in March, instead of June, a move that will ultimately end the bond-buying program. This was quicker than expected and could lead to an earlier interest rate rise in 2022. Federal Reserve Chairman Jerome Powell also talked about how to lower inflation, which, according to CNN last week, has “risen to a 39-year high over the 12-month period ended in November.” Given the uncertainties of the omicron variant, Powell said that, ​​“moving forward the end of our taper by a few months is really an appropriate thing to do.”

Fed officials believed earlier that higher price pressures this year were from supply-chain bottlenecks and that they would get better over time. But as CNN explained, “… the central bank also reserves the right to change the pace of monthly purchases again if the economic outlook demands it…” Essentially, along with impending rate hikes, traders can also expect higher inflation to remain, which  can significantly impact annual percentage rates, or APR, for loans, including mortgages. But higher rates are not limited to the U.S. On Thursday  The Bank of England announced it had increased interest rates for the first time since the start of the pandemic.

Trader Bet $65 Million in Options on Stock Rebound Into Holiday

https://www.bloomberg.com/news/articles/2021-12-14/one-trader-wagered-65-million-on-stock-rebound-into-holiday?sref=wgRWWeJL

One wealthy investor made headlines this week with the purchase of $65 million in options. Blomberg reported that the investor bought nearly 20,000 call spreads that are linked to the S&P 500 and expire right before the Christmas holiday. The investor also sold calls with a strike price at about 4,700. Bloomberg says that this is to fund those bullish options positions. Considering that U.S. stocks fell this week, we can’t help wondering about the investor’s strategy. When it comes down to the reasoning behind the bet, Bloomberg reporter Lu Wang wrote that “the strategy behind the trade is impossible to discern.”

FIA: Global Exchange-Traded Volume up 38.8% in November; Open Interest Posts Record

https://johnlothiannews.com/fia-global-exchange-traded-volume-up-38-8-in-november-open-interest-posts-record/

Exchange-traded volume saw a new high this week as the FIA’s monthly report recorded a higher volume again in November. As JLN’s own Suzanne Cosgrove reports, 6.17 billion futures and options contracts were traded in November, which is a notable rise of 11.5% from the previous month. 

Simon Ho, CEO of T3 Index Explains T3 Index Products 

https://vimeo.com/manage/videos/622687046

Simon Ho Explains T3 Index Products

https://t3index.com/

Recently, John Lothian News sat down with T3 CEO Simon Ho. For those unfamiliar with T3, the firm is a research-driven financial indexing firm that handles everything from a crypto volatility index to a SPIKES Volatility index, along with a host of other indexes and products.  And when it comes to these products, especially crypto, Ho says the demand is high. Crypto volatility products from T3 focus on bitcoin and ethereum. T3’s history, SPIKES, and even a new venture called the Yield Volatility Index are all discussed in this interview, so be sure to check it out.

January 2022 Options Now Available For iShares Trust – iShares Russell 2000 ETF (IWM)

Nasdaq

/bit.ly/3m4uUbq

Investors looking to trade January 2022 options contracts for iShares Trust are in luck. iShares Trust is an assortment of ETFs that monitor bond and stock market indexes. Nasdaq reported that new iShares Trust options contracts are now available, with expiration in January 2022. This also includes a put contract at a $215.00 strike price, which Nasdaq says has a current bid of $6.72. 

AMC Entertainment: Blockbuster Options Activity

Craig Jones

https://www.benzinga.com/trading-ideas/short-ideas/21/12/24614408/amc-entertainment-blockbuster-options-activity

It’s the end of the week and what better way to start the weekend than by grabbing your butter and your popcorn because AMC – yes, the theater chain – is making headlines for its options activity. Having battled the omicron uncertainties, this week Benzinga’s Craig Jones reported that after Monday’s 15% selloff, AMC Entertainment Holdings, Inc. rose nearly 6% on Tuesday. Now, the largest movie theater chain in the world is trading at relatively normal volumes. Benzinga also noted that “the most active puts were the December 20th… with buyers of 44,000 contracts at an average price of 64 cents per contract.” Apparently, investors think the stock will decline by at least 20% by the end of the week.

And since you’re still here with us, be sure to check out John’s Take as he dives into the topic of meme stocks and options. While you’re there, check out our new “Options Term of the Week,” where Jermal Chandler will explain European-style options.

 

THANKS FOR WATCHING AND MERRY CHRISTMAS AND HAPPY HOLIDAYS FROM JLN. 

John Takes a Look at Cboe’s Meme Stock and Options Report

Cboe drops timely report looking at impact of meme stock trading on equities and options trading

 

John's Take Script

The Cboe’s Equities Execution Consulting team dropped a big report on Thursday that looked at How Meme Stocks Impact Options Trading. This is an extremely timely subject.

This research group of the Cboe examined this meme-focused trend as well as the retail meme stock trading phenomenon with a series of reports including “A Deep Dive into US Equities Trading Venues,” “The Lasting Results of an Unprecedented Market Environment,” and “Interlisted Trading Trends and Opportunities.”

The Cboe team said, “These analyses showed how the influx of retail participant order flow and meme stock trading impacted the U.S. and Canadian equities markets but left us wondering about the impact on options markets.”

They looked at the top 15 stocks mentioned on Reddit each day on the r/wallstreetbets forum since 2019.

The Cboe team provided some great charts and graphs showing data from the Cboe Data Shop in their report, which I will share here.

The first chart shows the top 15 meme names as a percentage of total volume in equities and options. The meme stocks accounted for 4.2% of total equity volume, while in 2021 the meme stocks accounted for 5% of total equity volume. Cboe said that with the exclusion of index options, meme stocks accounted for 21.4% of total options volume in 2020 and declined to 10.1% in 2021. Overall options volume in meme stocks declined from 2020 to 2021, but there are still a number of days where these stocks make up more than 25% of total options volume.

The Cboe looked at exchange market share. Of course they reported that Cboe’s exchanges showed consistent market share across equities and options. And they gave credit to Cboe’s EDGX capturing considerable market share in the meme stocks as likely due to what it called its “innovative Retail Priority program.”

The report also looked at the breakdown of TRF market share versus Principal Dealer Market Share.

They also looked at price and volume moves when a stock becomes a meme.

The report said equities and options see a significant increase in volume on the first day when a stock is mentioned, but the increase is short-lived. The volume by day three is noticeably lower and by day 14 through 45 is completely gone for both equities and options. There are some exceptions, though.

 The Cboe report also looked at trade count by size, meaning how many contracts or shares traders traded. The zero-commission fee structure helped encourage more small lot trading, previous studies have shown.

 The number of equities trades executed with a size of 1,000 shares or less drastically jumped at the beginning of 2020.  In January 2021, trades with a size of 11 to 100 shares increased to almost 1 million trades per day, the Cboe report said.

 Day trading activity also played into the meme stock phenomena and the Cboe report. The report looks at the ratio of buys to sells. The  meme stock buy-to-sell ratio spiked to 1.4 in April 2020. Later it returned to about 1. On the Cboe’s options exchanges the ratio for meme stocks showed mostly day trading.

 The report looked at clearing volume to show how much of an impact the retail volume had on options markets during the beginning of 2021. Customer volume jumped above market maker volume during this time, which was a historical anomaly, and there was an increase of customer to customer trading, also an anomaly. 

 The report looked at the put-call ratio, which at .7 is considered a healthy market, Cboe said.

 And they looked at open interest and customer volume when a stock becomes a meme. When a stock enters the top 15 list, the median increase in total open interest is 3%. The open interest continues to rise over the days and weeks to come, showing new money coming into the market. The median increase in volume on day one was 23%, but then decreases two weeks later and continues to decline, Cboe said.

 The report looked at options sentiment, which at this time of year can be very mushy because of the XMAS holiday. Just kidding.

Here is what Cboe concluded: 

“While meme stocks are not the force they were in early 2021, our studies show that they continue to play a crucial role in both the U.S. equities and options markets. Retail traders and the use of online discussion boards have a meaningful impact on price and volume when a stock begins to gain momentum among these investors.”

“European-Style Options” is the Term of the Week

Term of the Week by tastytrade’s Jermal Chandler.

Term Of The Week Script

Hi, my name is Jermal Chandler.

I am an on-air personality at tastytrade and this is The Spread’s “Options Term of the Week.”

A European-style option is a version of an options contract that limits exercise rights to only the day of expiration and never before. For example, if an investor has a call option that matures on January 21, then they can only execute it on January 21. That said, the exercise limitations do not prevent investors from buying and selling the option freely throughout the life of the contract. Many index option products are settled European-style.

Another distinguishing factor of European-style options is that they settle into cash. No shares exchange hands. The option owner receives the cash value of the option and the option seller pays the cash value of the option. That cash value is equal to the option’s intrinsic value. If the option is out of the money, it expires worthless and has zero cash value.

One complicating factor with European-style options is the settlement price. For monthly contracts, at the close of the market on the third Thursday of the month, trading on European-style options ceases. However, the settlement price of an option is determined by the opening price of the index components on the morning of the third Friday of the month. If there are significant movements in the price of an underlying asset, the settlement price of the contract could be somewhat surprising.

Furthermore, the settlement price of the contract is often not published until late in the morning on Friday. So the settlement price can remain unclear for a time.

Weekly European-style options can have various final trading and settlement dates so it’s best to look them up for the security being traded prior to execution.

The tax treatment for European-style options is a little bit more favorable as they receive the IRS Section 1256 tax treatment. This means that 60% of the gains can be counted as long-term capital gains, which would be at the lower 15% rate. And 40% of the profit can be taxed as ordinary income. Naturally, one should consult a tax advisor for more information.

Ultimately, investors need to be aware of the type of option they buy and sell, especially if they plan to trade or exercise the option on its last possible trading day. In addition, remember that European-style options have different characteristics than the more popular American-style options.

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Alex Perry Author John Lothian News

ALEX PERRY

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Alex Perry is an Associate Editor with John Lothian News with a primary portfolio of contributing to the options-centric video series The Spread and options related news.

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John J. Lothian is the founder and co-owner of MarketsWikiMarketsWiki Education and MarketsReformWiki and the publisher of John Lothian News.

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