How Options Could Trigger Next Market Meltdown; Neuberger Berman Rode the Swoon by Selling Vol

May 16, 2019

Observations & Insight

New Product, New Exchange, and Equities on the Way for MIAX

MIAX has done nothing but make moves of late. The exchange group launched options on SPIKES (a volatility index based on options on the SPDR S&P 500 ETF Trust), opened the U.S. options industry’s 16th exchange (MIAX Emerald), announced it would partner with the Minneapolis Grain Exchange to list futures on SPIKES, and said it would be launching an equities exchange.

In this first video from the 2019 Options Exchange Leader Series, MIAX Executive Vice President of Strategic Planning and Operations Shelly Brown talks about MIAX’s efforts in 2019 as well as a few lingering issues the options industry needs to address to continue the momentum generated by a banner 2018.

Watch the video »

****SD: This is the first video of the 2019 Options Exchange Leader Series filmed at this year’s Options Industry Conference in Doral, Fla. Other videos to look forward to will feature BOX’s Ed Boyle, Cboe’s Arianne Criqui, Nasdaq’s Greg Ferrari and NYSE’s Ivan Brown.~SD


Uber Options Preview
Henry Schwartz – LinkedIn
Based on US Options Exchange Rules for listing options, Uber calls and puts will begin trading on Thursday May 16th. Given the high-profile nature of the company and extensive press coverage as the largest IPO in years, many traders are eager to utilize listed options for short and long-term hedges and trades expressing specific views of future prices, idiosyncratic risk, volatility, and stock-loan rates for short-sellers. A quick review of Lyft options, listed shortly after the March 29th IPO, can provide a reasonable estimate of what to expect from Uber options later this week.

****SD: Off to the races!


Open Outcry Project Update

Yesterday, Jim Downs of Connamara Systems swung through the office for an interview that will be part of the Open Outcry Traders History Project. Downs was a market maker on on the Cboe floor through most of the ’80s and ’90s – from single stocks, to OEX, to SPX. I found an old news clip pertaining to a floor story he mentioned about the Super Bowl Shuffle (of ’85 Bears renown).
(Click for larger image)
Where you or someone you know a long time participant in open outcry trading at a futures, equities or options exchange? Want to tell your story? Please reach out to


How to Improve Gender Equality; Accepting the Challenge to Go 50:50
John Lothian – Publisher – John Lothian News

I have been challenged by a senior woman in the derivatives industry to promote gender equality in my newsletter. For as much as I do to support women in the industry and in general, evidently I need to do more. Life is like that, you can always do more.

A story yesterday in the Washington Post about the media world featured a television anchor from the BBC who realized there were too many men, or men exclusively, on programs and not enough women. So this anchor decided to make it 50:50 for men and women appearing on his shows and this has turned into a global phenomenon.

For the rest of the commentary, click HERE

****SD: Look for our video with Diane Saucier tomorrow regarding diversity.

Lead Stories

How Stock Options Could Trigger the Next Market Meltdown
Steve Sears – Barron’s
Investors are rightfully focused on the trade war between China and the U.S., but almost everyone is unaware of conditions deep within the options market that could send stock prices sharply lower if something happens to jolt sentiment.
Each month, hedge funds and other institutional investors sell S&P 500 index put and call options that are 3% to 5% below and above the index’s actual market level. The strategy bets that the stock market will trade up or down in a relatively narrow range over the next 30 days. If this proves true, the investors collect a hefty amount of money. If they are wrong, chaos could ensue.

Neuberger Berman Just Rode the Stock Swoon by Selling Volatility
Cecile Gutscher and Yakob Peterseil – Bloomberg (SUBSCRIPTION)
Trillions got wiped out, volatility surged and investors ran to havens. Yet a racy bet on market serenity bested mainstream stocks in the market swoon.
The options-selling strategy, now a multi-billion dollar juggernaut, was one way Wall Street warded off steep losses this month.

LNG derivatives take off; Trading surges as the global liquefied natural gas industry shifts to market-based pricing
Ciaran Roe and Frank Konertz of S&P Global Platts in MarketVoice
The liquefied natural gas (LNG) industry’s emergence as a distinct hydrocarbon market has accelerated in 2019. Having historically been seen as a product that traded solely on long-term contracts indexed against oil and natural gas prices, LNG is maturing from its position as “junior partner” to become a mature commodity with its own dynamic spot market. The LNG spot market accounted for 25% of total trade in the product in 2018, versus 20% the year prior, according to the International Group of Liquefied Natural Gas Importers.

Comment on Reuters story “ICE gets CFTC nod for ‘speed bump’ on U.S. futures exchange”
Rob D’Arco, CEO, Rival Systems via LinkedIn
It will be interesting to monitor how the ICE speed bump impacts the market. The fundamental problem is when a future order takes out multiple levels of the book the order queues back up and trade reporting at the exchange is delayed. I think the CBOE’s approach of having dedicated purge ports that aren’t subject to order-queueing is another interesting approach. Once the C1 Bats migration takes place in October we’ll be able to better analyze how well purge ports perform. Users quoting E-mini and SPX price the options off the same underlying future but send mass quotes to two different exchanges. Will the CBOE’s purge port perform better than the CME’s mass cancel?

****SD: The FT’s story on ICE’s speed bump is titled US regulator throws sand in the wheels of high-frequency traders. What that FT story neglects to mention is that some (not a lot, but some) high speed traders are FOR the bump – kind of a key point to leave out.

May Acuiti Derivatives Insight Report Released Today
The May Acuiti Derivatives Insight Report has found that the global derivatives industry reported faltering revenues in April in the face of lower volatility and subdued volumes.

Pork market volatility is the new normal
Steve Malakowsky- National Hog Farmer
News of African swine fever is everywhere. You can’t pick up an industry magazine or visit an agriculture website without information on how it will impact China and their need for pork. This event has changed the landscape of the world pork industry faster than any single occurrence in my career in the pork industry.

****SD: I don’t recall how much we have put in the newsletter regarding African swine fever, but given what it has done to pork markets, keep an eye on it. Check out the ATM vol term structure for lean hogs via Bantix’ QuikStrike tool on CME’s site. Oh, and did you see that CME launched a Fresh Bacon Index?

War Zone Childhood Inspired Hedge Fund Quant’s Contrarian Wagers; Nigol Koulajian’s $1.35 billion Quest Partners is ready to profit whenever volatility strikes the complacent herd.
Vincent Bielski – Bloomberg (SUBSCRIPTION)
Nigol Koulajian, founder of New York-based Quest Partners, has beaten rival hedge fund managers over two decades by refusing to follow them into crowded trades. Since the financial crisis, commodity-trading advisers (CTAs), which specialize in trading futures or options, have piled into long-term bullish bets, riding the market up in search of steady gains. That’s left them vulnerable to big losses when volatility strikes – the very moments when Koulajian’s $1.35 billion quant firm cleans up.

****SD: I don’t think I’ve seen someone refer to prepping for tail risk as betting on unpleasantness for asset managers.

Election 2019: Uncertainty over option premiums and low liquidity keep traders off poll bets
Ashutosh Shyam – Economic Times India
An event risk is typically a delight for derivatives traders who use market volatility to mint money. However, this time around they are finding it challenging to cash in on the expected volatility on May 23, the day when results of the general elections will be out. This is due to low liquidity and inability of option sellers (writers of the options) to compute probability adjusted premium, thereby blurring the price discovery process.

Exchanges and Clearing

CME Group Hits New Open Interest Record of 138.2 Million Contracts
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, announced total open interest reached a record 138,185,824 contracts on May 14, 2019. The previous record was 138,041,727 contracts set on March 15, 2018.

Testing the waterfall: CME and LCH stand up to stress tests
Will Acworth – MarketVoice
On May 1, the Commodity Futures Trading Commission released a report on tests that it conducted on the financial resources held by two large clearinghouses to cover losses arising from a member default. The tests, which were based on data collected in 2018, were part of the agency’s ongoing program to ensure the resiliency of the clearing system and its ability to absorb extreme market movements.

Euronext’s shareholders unanimously voted in favour of Euronext’s acquisition of up to 100% of Oslo Bors VPS
Euronext, the leading pan-European exchange, announced today that its shareholders unanimously voted in favour of Euronext’s acquisition of up to 100% of Oslo Bors VPS’s capital during the General Meeting of Shareholders held on 16 May 2019 in Amsterdam.

****SD: FOW reports that Euronext is eyeing other acquisitions.

OCC allays trade identity concerns
Louisa Chender – Global Investor Group (SUBSCRIPTION)
OCC amends rule following clearing members’ concerns about handling trades they couldn’t timely identify

Nodal Exchange Named “Commodity Exchange of the Year” by Energy Risk
Nodal Exchange has been named “Commodity Exchange of the Year” by Energy Risk magazine at the Energy Risk Awards 2019. Energy Risk Awards recognize excellence across global energy and commodities markets.

Regulation & Enforcement

Citigroup Hit Hardest as EU Fines Banks $1.2 Billion Over FX
Aoife White and Stephanie Bodoni – Bloomberg (SUBSCRIPTION)
Citigroup Inc., Royal Bank of Scotland Group Plc and JPMorgan Chase & Co. are among five banks that agreed to pay European Union fines totaling 1.07 billion euros ($1.2 billion) for colluding on foreign-exchange trading strategies.

****SD: Something I’ve been keeping an eye on is mentioned in the very last graf of the above Bloomberg story – “The EU regulator is also looking at ‘potential coordination in options trading’ in the FX market, HSBC Holdings Plc said in its annual report in February. HSBC received questions from regulators in October and the investigation is at an early stage, it said.” Funnily enough, I also saw this FT story – Big banks to fight Mifid push for extra transparency in FX markets.

Examining The Evidence On VIX Manipulation
An ongoing multidistrict litigation alleges manipulation of the formula used to determine the settlement price for derivatives based on the Chicago Board Options Exchange’s volatility index, known as the VIX.

Patrick Buhannic Voluntarily Withdraws from All Suits Against TradingScreen
Press Release
TradingScreen Inc. (TS), the global, multi-asset class order and execution management system (OEMS), today announced that Patrick Buhannic has voluntarily agreed to be dismissed with prejudice from all the lawsuits brought by his brother Philippe Buhannic against TradingScreen and other defendants in New York State Court and U.S. District Court for the Southern District of New York. As a result, Philippe Buhannic is the only remaining plaintiff (representing himself pro se) in those actions.

****SD: What a strange case this was.


Traders bet on higher volatility in copper amid US-China trade war
Ram Sahgal – Economic Times India
Traders on MCX are taking positions on base metals to benefit from expected rise in volatility amid the ongoing trade war between US and China. To play this volatility, brokers are advising their wealthy clients to sell a copper futures contract expiring on June 28 while simultaneously buying two out of the money (OTM) call options expiring on June 26.

****SD: Copper is and has been known as a big China play. Not surprising.

With S&P 500 support holding, watch the fight between these two levels
Lawrence G. McMillan – MarketWatch
Volatility was introduced into the market on May 6 when it was announced that no China trade deal was in place. Intraday volatility has been greater than realized volatility; implied volatility has been between the two.


The woman who nailed the 2018 stock-market volatility blowup has kicked off an actively managed ETF
Mark DeCambre – MarketWatch
Nancy Davis, the chief investment officer and founder of advisory firm Quadratic Capital, is the brain behind a new exchange-traded fund on Wall Street that aims to offer investors ways to bet on inflation, the shape of the so-called yield curve and a sharp rise in interest rates.

****SD: In case you missed the news earlier in the week.

Coming marine fuel standard will disrupt markets for 1-5 years: BCG study
Erwin Seba – Reuters
The marine industry’s January 2020 shift to using very low sulfur fuel oil (VLSFO) to power ships worldwide will launch a one- to five-year disruption in oil and refined products markets, according to a study released Thursday by Boston Consulting Group.

****SD: I’ll again direct readers to a video with SGX’s Michael Syn, who knows quite a bit about the IMO fuel mandate – FX Futures, Japanese Equity Repo and Marine Fuel – Michael Syn, SGX.

Tell Us Something We Don’t Know About QQQ (PODCAST)
Eric Balchunas, Joel Weber and Carolina Wilson – Bloomberg (SUBSCRIPTION)
If ETFs had a Mount Rushmore, QQQ (aka ‘The Qs’) would definitely be on it. This $72 billion legend of an ETF just turned 20 years old and is now the second most traded security in the world. But how much do investors really know about it?

****SD: If QQQ takes one of the four spots on “Mount ETF,” what should the others be? Obviously, SPY takes a spot. But after that, the field widens pretty quickly. There’s an argument to be made for IWM, VXX, EEM, HYG (of late), XLF, and a few others.

Indexes to Unleash Flood of Money Into Chinese Stocks
Asjylyn Loder – WSJ (SUBSCRIPTION)
Investors are about to buy billions of dollars in mainland Chinese stocks even as trade tensions whipsaw markets.
Two of the largest global index providers, MSCI Inc. and FTSE Russell, will soon begin ratcheting up exposure to companies listed on China’s domestic exchanges. The increases will force asset managers to purchase shares of Chinese companies to match their changing benchmark.

****SD: Issues: “MSCI has also identified several problems that will have to be addressed, said Chin Ping Chia, a Hong Kong-based managing director of research with MSCI. The barriers include timing differences for trade settlement, Hong Kong holidays that prevent overseas investors from accessing mainland markets even when trading is open, and the inability of non-Chinese investors to take advantage of derivatives used to hedge their exposure, like stock-index futures and options.”

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