How Options-Market Amateurs Might Have Tripped Up Big Tech

Sep 4, 2020

Observations & Insight

Editor’s Note: In observation of the Labor Day holiday in the US we will not be publishing JLN Options on Monday, September 7, 2020. We will be back on Tuesday.


The Options Clearing Corporation told us that, “Thursday’s market activity resulted in a new record of 7,111,658 trades cleared at OCC, and the fourth highest contract volume day of 45,884,033 total cleared contracts.” Given the stories below you can see why.

Lead Stories

How Options-Market Amateurs Might Have Tripped Up Big Tech
Jon Sindreu – WSJ
U.S. technology giants have stumbled. In true David and Goliath fashion, it might be the work of amateur investors dabbling with derivatives.
On Thursday, equities were thrown into turmoil by a sudden reversal of fortunes: The tech-heavy Nasdaq Composite dropped 5%—and marked the fourth-largest one-day point decline in its history—even as battered airline shares notched modest gains.

****JB: Also read Bloomberg’s story, Day Trader Options Frenzy Turns Ugly in $730 Billion Nasdaq Rout.

SoftBank unmasked as ‘Nasdaq whale’ that stoked tech rally
Kana Inagaki, Katie Martin, Robert Smith and Robin Wigglesworth – Financial Times
SoftBank is the “Nasdaq whale” that has bought billions of dollars’ worth of US equity derivatives in a move that stoked the fevered rally in big tech stocks before a sharp pullback on Thursday, according to people familiar with the matter.
The Japanese conglomerate has been snapping up options in tech stocks during the past month in huge amounts, fuelling the largest trading volumes ever in contracts linked to individual companies, these people said. One banker described it as a “dangerous” bet.

****JB: Also read The Wall Street Journal’s story, SoftBank’s Bet on Tech Giants Fueled Powerful Market Rally.

Dow Drops About 400 Points, Extending Selloff
Joe Wallace and Michael Wursthorn – WSJ
U.S. stocks tumbled again Friday as investors continued to abandon the technology trade that had fueled the market’s recent rebound.
Big tech stocks weakened for a second consecutive day, pushing all three major stock benchmarks toward their biggest weekly losses in months. Investors appeared to be taking some profits after a big run-up in some of the stocks deemed to be beneficiaries of the coronavirus pandemic.

Mystery Solved: Days Like This Are What the VIX Warned About
Sarah Ponczek – Bloomberg
Traders professing bafflement over recent ominous moves in volatility indexes got some clarity on Thursday.
The situation — the VIX’s persistent and unusual advance in tandem with the S&P 500 — was thought unsustainable. On Thursday, it came asunder, as the biggest selloff in four months swept through U.S. equities, particularly tech stocks.

Wall Street’s top fear gauge just hit its highest level since July amid major stock selloff
Carmen Reinicke – Markets Insider
Wall Street’s favorite fear gauge just hit its highest level since July amid a major stock market selloff.
The Cboe Volatility Index, or Vix, spiked as much as 26% to 33.45 on Thursday, the highest reading in seven weeks. The jump in volatility came as stocks sold off sharply on Thursday, retreating from record highs hit earlier in the week by the S&P 500 and the Nasdaq.

Market re-rating of tech sector will bring volatility
Richard Waters – Financial Times
A feature of the stock market for much of this year has been the search for a new valuation level for those parts of the tech sector whose fortunes have been transformed by the coronavirus crisis. But in the dog days of August, things really got out of hand.
Re-ratings like this, when they take hold, are often accompanied by significant volatility. That became clear on Thursday, after a wobble that saw Apple lose 8 per cent, or more than $150bn, of value.

US stocks can ‘easily’ decline another 10% after suffering their biggest drop since June, warns Mohamed El-Erian
Shalini Nagarajan – Markets Insider
Markets could be headed for a correction if investors switch their positions in the coming days, economist Mohamed El-Erian said on CNBC’s “Closing Bell” after US equities tanked by the most since June 11.
The economist warned that a change in mindset could be on the horizon, meaning that market participants should be on the watch.
“We could have another 10% fall, easily…if people start thinking fundamentals,” he said.

Charts That Only Went Up Rapidly Redrawn in Volatility Bout
Kamaron Leach and Claire Ballentine – Bloomberg
Stocks that charged higher virtually uninterrupted since June got hammered Thursday, redrawing a swath of charts in a hurry.
The carnage was almost everywhere. The Nasdaq 100 sank more than 5.5% in its worst day since the depths of the pandemic. Apple lost $145 billion in market cap, dropping it back below $2 trillion. Stay-at-home darlings Zoom Video and DocuSign plunged 10%. All 30 Dow Jones Industrial Average components fell and only 40 S&P 500 stocks gained. The VIX fear gauge spiked toward 35.

The stock market’s big sell-off amounts to ‘healthy’ recalibration before heading even higher, says BlackRock’s bond chief who oversees $2.3 trillion
Emily Graffeo – Markets Insider
Rick Rieder, BlackRock’s global chief investment officer of fixed income, told Bloomberg on Friday that the stock market’s sell-off on Thursday was a “healthy” recalibration, and he still believes stocks can go higher.
“I think the market got ahead of itself and then recalibrated,” Rieder said. “The amount of exuberance particularly around some of those tech names was just overdone.”

2016 all over again? Investors ready for big market moves as U.S. election nears
April Joyner – Reuters
Market volatility is back – and investors expect more wild swings in the coming weeks and months as the U.S. presidential election closes in.Regardless of who wins the Nov. 3 election, some market watchers say, markets are likely to grow more turbulent. Economic uncertainty resulting from the coronavirus pandemic still looms large, and the possibility of a delayed vote count due to a large number of mail-in ballots has also unsettled some investors. Moreover, a buildup of positions in big tech-related stocks has increased risk, as seen in a sharp market sell-off on Thursday.

Nasdaq Plunge Is Victory Lap for a Stable of Stock Naysayers
Katherine Greifeld – Bloomberg
Whatever else it signifies, and it may not be much, considering what happened the last time stocks did this, Thursday’s plunge in equities was vindication for bearish strategists whose voices had been getting louder.
Skepticism looked smart with big technology companies posting the biggest drop since March. Warnings that valuations were out of control and investors would pay for their euphoria have been swirling around for weeks amid a stretch in which the S&P 500 went 30 sessions without a 1% decline. On Thursday, it fell 3.5%, while the Nasdaq 100 lost 5.2%.

Exchanges and Clearing

Change to Margin Parameter for Customer Option Value Aggregation
CME Group
Effective with the end-of-day settlement cycle for Monday, September 14, 2020, CME Clearing will switch from 90% customer net option value aggregation to 100% (full net treatment) option value aggregation, for the determination of performance bond requirements for customer-segregated (CSEG) positions in the base guarantee fund.

*****JJL: This appears to be a reversal of the treatment of net option value (“NOV”) at the clearinghouse. Back on May 22, the CME announced they planned on changing the treatment of NOV from a gross basis across all customer accounts at an FCM to net across each customer. This would result in the CME being able to see on an account basis where the option risk is at the brokerage firm. According to an FCM executive, this would have greatly increased the amount of money the FCMs had to put up at the CME clearinghouse and reduced their profitability. From the exchange perspective, they would have greater transparency into where issues were at firms. The FCMs protested the May 22 memo, which caused the CME to freeze the NOV level at a 10% haircut. The May 22 memo had this moving from 10% to 100% by the end of June. Now, the 10% haircut seems to have been removed. If you have some insights to share on this move from the CME, on or off the record, I am glad to hear from you.


The Stock Market Is Getting Crushed. Why Its Riskiest Stocks Have Been the Safest Place to Hide.
Ben Levisohn – Barron’s
The stock market sold off Thursday—hard—and nearly everything got clobbered. In a surprise twist, though, it was the market’s riskiest stocks that held up best.
Consider: The Nasdaq Composite, which had been outperforming all year, tumbled nearly 5%, while the S&P 500, which was trading at an all-time high, has dropped 3.5%, and the Dow Jones Industrial Average, which was lagging during the market’s coronavirus comeback, has fallen 808 points, or 2.8%. That would suggest that investors have chosen today to unload their winning stocks in a big way. A quick look at Apple —the market’s biggest stock and among its best performing—suggests that’s true: It was down 8% at 120.88.

BofA raises S&P 500 index target but still sees stocks giving back some gains by year-end
William Watts – MarketWatch
U.S. stocks will give back some ground by year-end, but not as much as previously expected, according to BofA Securities equity and quant strategist Savita Subramanian, in a Thursday note titled, “The New Abnormal.”


Stock Selloff: Investors’ DNA Will Be Put to the Test
Mohamed A. El-Erian – Bloomberg
As large and as abrupt as Thursday’s U.S. stock market selloff may seem to many, it should come as no big surprise to experienced investors. Markets were poised for a pullback after five consecutive monthly gains; the best August in decades; successive records for the S&P 500 and Nasdaq indexes; and a two-day tear to start September. A much more interesting question is what happens next. Will stocks get in line with a growing set of market segments that have been somewhat more attuned to fundamentals recently, or will this selloff simply trigger what has been an extremely reliable and lucrative “buy-the-dip” conditioning?

Vanguard opposes a tax on Wall Street its founder John Bogle favored — and the reason may surprise you
Michael Edesess – MarketWatch
Last January, MarketWatch published an article I wrote about Vanguard Group’s research on a financial transaction tax (FTT). The U.S. mutual fund giant argued — in solidarity with a number of financial industry companies and lobbying organizations — that a small tax on Wall Street financial transactions “would harm everyday savers.” Vanguard’s piece claimed to quantify “the hardships imposed on American families.”

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