Filling gaps in market data with optimal transport

Apr 11, 2024

Observations & Insight

Volatility Insight of the Week: CME Group’s volatility index indicates Soybean Oil Skew Ratio is reaching a 3-month high. To learn more about CME Group’s Volatility Index, please visit here


Lead Stories

Filling gaps in market data with optimal transport; Julius Baer quant proposes novel way to generate accurate prices for illiquid maturities
Mauro Cesa –
Even the most highly traded derivatives can have illiquid points that create gaps in the implied volatility surfaces traders use for pricing. When those illiquid points are surrounded by liquid points, interpolation methods can be used to fill in the gaps. But for deep out-of-the-money strikes and long-dated maturities that are rarely traded, a reliable methodology for extrapolating prices is lacking, with traders often relying on crude approximations that are akin to rules of thumb.

‘Tokenized Hedge Fund’ Rakes in Crypto Billions With 37% Yield
Muyao Shen – Bloomberg
A crypto token that aims to replicate a common hedge-fund trade is attracting billions of dollars worth of tokens and widespread buzz in the market. Yet the project, known as Ethena, is also stoking skepticism about the sustainability of its yields that are currently about 37%. Ethena and its USDe token, a so-called synthetic dollar, achieves its goal through crypto’s version of the basis trade, which exploits differences in prices between spot and futures markets. The strategy, known in crypto as a cash-and-carry trade, has proven particularly profitable recently as token prices march higher and higher and funding rates – the interest paid by bullish traders to maintain a futures position – surge.

Bond Traders Are Preparing for a 5% Yield, No Rate Cut World
Ruth Carson and Masaki Kondo – Bloomberg
Bond traders are readying for 10-year US Treasury yields surpassing 5% as the scenario of no rate cuts by the Federal Reserve this year looks increasingly possible. Schroders Plc is shorting US bonds across some tenors as sticky inflation raises the risk of higher-for-longer rates. Pacific Investment Management Co. expects the Fed to ease policy at a more gradual pace than peers in other developed markets, with a “non-negligible” chance that it doesn’t cut at all this year.

Fed Rate Cuts Are Now a Matter of If, Not Just When
Central bank officials started the year with the wind seemingly at their backs. No more.
Nick Timiraos – The Wall Street Journal
Another firmer-than-anticipated inflation report delivered a meaningful setback Wednesday to the Federal Reserve’s hope that it could buoy prospects of a so-called soft landing by dialing back some of the past year’s interest-rate increases.
Solid hiring and the prospect that inflation might settle out closer to 3% than the Fed’s 2% goal could call into question whether the central bank will be able to cut rates until much later in the year without evidence of a sharper slowdown in the economy.


ICE Reports Record Open Interest Across its Global Natural Gas Markets with Record Trading Activity in Natural Gas Options
Intercontinental Exchange
Intercontinental Exchange, Inc. (NYSE:ICE), a leading global provider of technology and data, today announced record open interest (OI) across its global natural gas futures and options markets as well as record trading activity in global natural gas options. On March 22, 2024, ICE’s global natural gas futures and options hit record OI of 40.2 million contracts, up 29% year-over-year (y/y). In North America, OI across ICE’s Henry Hub futures and options is up 33% y/y. These markets offer market participants the most liquid contracts to hedge long term exposure to U.S. natural gas prices. Meanwhile, ICE’s U.S. financial gas markets hit record OI of over 11 million futures and options contracts on April 1, 2024. ICE’s U.S. financial gas markets cover 70 hubs across North America allowing customers to manage regional supply and demand dynamics.


Top Goldman Sachs executive quits for hedge fund Millennium; Izzy Englander poaches latest partner from Wall Street bank, where David Solomon faces fresh unrest
Harriet Agnew in London and Joshua Franklin and Ortenca Aliaj – Financial Times
Goldman Sachs’ global treasurer, Philip Berlinski, is leaving the bank after 24 years for New York-based hedge fund Millennium Management, according to two people familiar with the situation.
Goldman has proved fertile hunting ground for Millennium founder Izzy Englander, who has tapped several of the bank’s partners for roles at his $62.2bn hedge fund as he moves to build out the management ranks of the 35-year-old firm.


Using Options to Profit During Earnings Season; Pre-earnings sentiment can affect the post-earnings behavior of a stock
Jake Scott – Schaeffer’s Investment Research
When combined with fundamental and technical factors (a three-tiered methodology we call Expectational Analysis ), sentiment becomes a powerful tool for analyzing stocks, sectors, or the overall market. This is especially important as earnings season ramps up.
It’s the beginning of the second quarter and a new earnings season, a time of trepidation and anxiety for publicly held companies. But according to Schaeffer’s Investment Research, a privately held provider of stock and options trading recommendations, earnings season also provides a look under the hood of how companies have been managed over the past few months and how they may fare going forward.

Market Volatility Is Back. These Stocks Can Provide Shelter and Returns.
Jacob Sonenshine – Barron’s
Serenity is over. Now Volatility is back, and will likely be present for some time.

Cboe (Video)
In #Vol411, Scott Bauer @cboesib covers the market’s reaction to the PPI report and notable options trading activity.

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