JLN Options: FX Option Gauges Suggest Further Euro Losses Likely

Sep 26, 2012

Lead Stories

FX Option Gauges Suggest Further Euro Losses Likely
David Willmer, The Wall Street Journal
The euro has traded at two-week lows against a number of the major currencies Wednesday, and foreign exchange option market gauges suggest further losses for the common currency could well be in store.

The VIX roars back despite positive economic reports
Wall Street Sector Selector
The VIX came back with a surge today after the Standard and Poors cut the outlook rating for overall European to -.8%. The VIX index rose an astonishing 9.05%, while VIX ETFs including NYSEARCA:VXX and NYSEARCA:TVIX rose 7.88% and 14.39% respectively.  The fact that three positive economic reports did not push the VIX lower is likely indicative of the fact that S&P and investors feel an impending doom with Europe, despite Super Mario’s words a few weeks back regarding easing.  Even if the two largest central banks of the world ease the economy along, will that policy really work?  Regardless, fear has re-entered the marketplace as Europe is once again under scrutiny.

BofA Options Loss Reignites Debate on Controversial Strategy
Kaitlyn Kiernan, The Wall Street Journal
A $10 million loss tied to stock options suffered by Bank of America BAC Merrill Lynch last week renewed debate about an options-trading strategy that has been a source of controversy in the past.
The loss stemmed from the Charlotte, N.C., bank failing to properly execute a so-called dividend trade, which some in the industry say is designed to profit off smaller investors who may be ignorant of its workings or poorly positioned to avoid coming out on the losing end. 

Gold falls on euro zone fears, options expiration
Frank Tang, Reuters
Gold edged lower after choppy trade on Tuesday, on selling related to an option expiration and renewed fears about the euro zone debt crisis.
Scenes of large-scale protests against anti-austerity measures in Spain rekindled fears about the region’s three-year-old debt crisis.

U.S. hedge funds play “catch-up” after missing rally
Edward Krudy, Reuters
Many U.S. hedge funds that have the lagged the stock market rally in 2012 are now buying riskier stocks and commodities – and using more borrowed money – in an effort to play catch-up.
Funds have cut cash holdings and reversed broad bets against the surging market. If the shift in the $2 trillion hedge fund industry continues, it could drive asset prices even higher.


Exchanges See No Unfairness in Data Delivery Speeds
Peter Chapman, Traders Magazine
You get what you pay for.
In the wake of the Securities and Exchange Commission’s action this month against NYSE Euronext for disseminating New York Stock Exchange market data to paying customers ahead of other investors, exchange executives note that the public feed is naturally slower and those wanting their data faster expect to pay up.


EU plans to regulate High Frequency Trading will hurt investors
EU proposals to regulate high frequency trading under MiFID may well end up raising transaction costs for end-investors and pushing trading into the dark rather than making markets more transparent, argues Remco Lenterman.
“The negotiations on the revision of the EU’s law for securities markets, the Markets in Financial Instruments Directive (MiFID), are entering a crucial phase. Some proposals may well end up raising transaction costs for end-investors and pushing trading into the dark rather than making markets more transparent.
** Via a tweet just now (sorry, no link) I saw it reported that the European parliament’s economic affairs committee voted in favor of new Mifid rules. –JB

SEC Says New York Firm Allowed High-Speed Stock Manipulation
Whitney Kisling, BloombergBusinessweek
A New York-based brokerage allowed overseas clients to run a scheme aimed at distorting stock prices by rapidly canceling orders, according to the U.S. Securities and Exchange Commission.
Clients of Hold Brothers On-Line Investment Services were “repeatedly manipulating publicly traded stocks” by placing and erasing orders in an illegal strategy designed to trick others into buying or selling, the SEC said today in a release.


Trading The VIX Without Using Volatility Products
Brent Kenwell, Seeking Alpha
Let’s be honest: trading volatility can be a sucker’s game. You’ve either mastered it or are getting killed by it. Most have traded the levered ETFs for volatility, seeing as though you can’t buy shares of the Chicago Volatility Index (VIX). You can only trade the options for it. Products like TVIX, UVXY, and VXX are all long-volatility ETF products, with many traders playing it for a downside move and investors using it to protect their portfolio.

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