Huge trade offers chance to make $17 million if stocks tank; Oil Speculators Most Bullish Since ’14 After Wild Two Months; Goldman’s Libya Derivatives Were Fine

Oct 17, 2016

Observations & Insight

Today we present you with a new feature article, examining the growth of options on futures from Spencer Doar, associate editor of John Lothian News. It’s his first major piece for JLN and is the product of months of interviews with various exchange, trading and technology professionals. We invite you to take a look at just how far that product has come along in recent years. It’s also great cocktail hour fodder this week at FIA Expo.

A Tangled Web: Exploring The Explosive U.S. Growth Of Options On Futures
Spencer Doar – JLN

In 1982, the CME became the first exchange to offer options on futures products. That was nine years after the Chicago Board Options Exchange standardized the equity options market and five years after the CBOE were allowed to list puts.

While options on futures, also called futures options (or, even better, OOFs), have a 34-year history, the period since the financial crisis marks a new era for the market amid continually shifting currents. In 2011, 500 million contracts were traded. In 2015, industry volumes hit 756 million contracts, a 51 percent increase. Do not be mistaken, the volumes of options on futures were already on the march upwards in the years prior to 2008. In 1999, 115 million contracts were traded compared to 584 million in 2008. But the current environment rekindled that growth.

There is no one reason for the surge. Instead, just about every subject that dominates the financial news — regulatory purgatory, technological and product innovation, democratization of markets, central bank policy — played, and continues to play, a role in the trend.

To access the rest of the article, click here

Lead Stories

Huge trade offers chance to make $17 million if stocks tank
Alex Rosenberg – CNBC
In a massive trade executed on Friday afternoon, one trader appears to be betting big that small-cap stocks are set to sink. At 2:30 E.D.T., a trader appeared to execute a “put spread” on the IWM ETF, which tracks the Russell 2000 small-cap benchmark. Specifically, this trader bought 38,447 120-strike put options contracts and sold an equal number of 114-strike puts, for a total cost of $1.55 per share. Since each options contract refers to 100 shares of stock, the trade cost nearly $6 million in options premium.
cnb.cx/2edbOvS

Oil Speculators Most Bullish Since ’14 After Wild Two Months
Mark Shenk – Bloomberg
Bets on falling WTI crude price drop 53% in three weeks – CFTC; OPEC reached preliminary accord Sept. 28, next meeting Nov. 30
Oil investors must be getting dizzy. In the two months since OPEC began talking about capping production, speculators’ sentiment has swung wildly, with government and exchange data showing the four biggest weekly position changes ever for the two global benchmark crudes. The latest shift is to optimism, with money managers the most bullish on West Texas Intermediate oil in two years.
bloom.bg/2dISbKP

****SD: Reuters has Bullish bets on oil highest since 2014

Goldman’s Libya Derivatives Were Fine
Matt Levine – Bloomberg
Selling derivatives is basically a miserable life. If you’re selling a car, you show the customer the car, and you’re like, look at this car. It’s blue, it has some horsepower, it can make both left and right turns, the seats are soft, it has twelve cupholders. The customer gets in the car, drives it around the block, turns on the windshield wipers. He has an intelligible experience of the car that he can relate to other cars he’s encountered. If he likes the car, he gives you some money, and you give him the car. He values the car more than he values the money. You value the money more than you value the car. Everyone wins.
bloom.bg/2dITSI0

****SD: Always be sure to read Levine’s footnotes. A lot of humor down there. Keep an eye out for “caesar” mentions.

Is Bill Ackman Toast?
Vanity Fair
After a horrible year, the hedge-fund mogul’s adversaries seem to be plotting his demise. But does Ackman have a comeback left in him?
bit.ly/2dJ0xSG

Breakdown: The dismal art of forecasting sterling
Swaha Pattanaik – Reuters
Currency strategists can be divided even when they agree. Forecasts for where the pound will be trading against the dollar in 12 months’ time ranged from $1.05 to $1.47 in a Reuters poll published on Oct 6. Even after a flash crash on Oct. 7, it’s fair to say that most pound-watchers expect it to fall further over the coming months. A spat between UK retailer Tesco and supplier Unilever on who takes the hit from a weaker currency suggests businesses too are starting to prepare for sterling to be lower for longer.
reut.rs/2dIRJfF

****SD: I’d argue a dismal art is better than a dismal science.

Is Bill Ackman Toast?
William D. Cohan – Vanity Fair
After a horrible year, the hedge-fund mogul’s adversaries seem to be plotting his demise. But does Ackman have a comeback left in him?
bit.ly/2dJ0xSG

Gundlach says Yellen speech suggests accommodative Fed for longer
Jennifer Ablan – Reuters
Federal Reserve Chair Janet Yellen’s speech on Friday on running a “high pressure” economy with a tight labor market to reverse some of the negative effects of the Great Recession of 2008 suggests the U.S. central bank will stay accommodative for longer, according to Jeffrey Gundlach, chief executive of DoubleLine Capital. “I didn’t hear, ‘We are going to tighten in December,'” Gundlach said in a telephone interview. “I think she is concerned about the trend of economic growth. GDP is not doing what they want.”
reut.rs/2dIVH87

Exchanges

UK competition watchdog says ICE has to sell Trayport
Reuters
Financial and commodity markets operator Intercontinental Exchange Inc will have to sell commodities software house Trayport to preserve competition in the energy trading industry, Britain’s competition watchdog said on Monday.
reut.rs/2dISTrv

ICE to Start Gold Futures to Help Clear London Daily Auction
Eddie Van Der Walt and Ranjeetha Pakiam – Bloomberg
Intercontinental Exchange Inc., which runs the daily London gold auction, will start a futures contract for the metal in the U.S. in February, jumping the gun on the London Metal Exchange which is also working on a London-focused product.
bloom.bg/2egEJ5O

Regulation & Enforcement

CEO sold millions in Wells Fargo stock before fraud revelations
Kathy Kristof – CBS News
Former Wells Fargo Chairman and CEO John Stumpf sold $61 million worth of Wells Fargo (WFC) shares in the month prior to settling a long-running investigation that charged the bank with falsifying millions of customer accounts to boost sales and fees.
cbsn.ws/2egBHi0

How Spoofing Works & Why It is Illegal
Tayloe Draughon – Neurensic
The law of supply and demand is taught in every economics class. My children learned it in high school. It is simple to understand; yet it isn’t something we think about often. We don’t think about how it applies to our stock and commodity markets. The law of supply and demand is a theory that states that when something is in demand, and supply is lower than demand, then the price will rise. Conversely, when there is more supply than demand, then the price will decrease.
bit.ly/2dJ2YES

Removing the barriers to an efficient market
William Mitting – Futures & Options World
Why we need a market-driven, radical reform of the derivative industry.
Everyone you talk to in the market today raises the same concerns: rising costs and increased regulation are increasing barriers across the derivatives industry.
bit.ly/2egL80Q

Technology

BNP Paribas to underpin future and options trading with Fidessa
Finextra
Fidessa group plc (LSE: FDSA) has today announced that BNP Paribas has selected its derivatives trading platform to underpin the bank’s futures and options agency trading business.
Fidessa’s platform will support the complex workflow requirements of BNP Paribas’ listed derivatives trading operations across Europe, Asia-Pacific and North America.
bit.ly/2dIRVeT

Strategy

VIX Update: Contango Narrows – iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX)
Seeking Alpha
With all of the uncertainties facing the market, the CBOE Volatility Index or VIX has naturally started to climb as the S&P 500 has had a downward trajectory. With the spot VIX rising, the contango in the VIX futures curve has narrowed significantly.
bit.ly/2egDpQE

Hedge Funds Trim Record Bearish Wheat Wager as Demand Climbs
Megan Durisin – Bloomberg
Speculators reduce net-short position first time in 4 weeks; USDA trims outlook for world inventories in 2016-17 season
There are finally some signs of life in the wheat market. Prices surged last week by the most in 15 months after the U.S. Department of Agriculture unexpectedly cut its forecast of global inventories. That was fortuitous for some speculators. A day before the Oct. 12 USDA report, funds cut their record bets that prices would drop.
bloom.bg/2dIXZny

BigTrends.com Weekly Market Outlook – Damage Control
Moby Waller – CBOE Options Hub
The bulls tried and tried, but it was a lost cause last week. Stocks never recovered from last Tuesday’s stumble, and the bulls squandered their best chance to get back on a bullish track on Friday. All the major indices closed below key technical levels on Friday when the bullish effort that day petered out.
bit.ly/2egKIaW

Strong dollar pressures FX, but short-sellers need caution
Vikram Rangala – Nadex Binary Options
The US dollar is trading near a seven-month high. Treasuries dropped after U.S. retail sales data increased the likelihood of an interest rate hike by December. That dollar strength has pushed many currencies down, but before you jump into a short or countertrend swing trade, plan how you’ll limit your risk.
bit.ly/2egGccE

The Option Queen Newsletter
J.A. Schwarz – The Options Queen Newsletter
With just a few more weeks of this campaign torture left, we finally see a light at the end of the election tunnel. No matter who emerges the victor, it will be a win for all, as we will no longer have to listen to the daily dirty laundry “leaked” by whoever. Meanwhile the market is truly range-bound and remains in a wide but clear trading range. The US Dollar, on the other hand, has broken out to the upside; the next targets are 98.59, 99.70 and then 100.6. With that, we see a retreat in commodity prices, which, is deflationary. Crude oil has been in rally mode ignoring the strength of the US Dollar which tells us to pay attention as it challenges the first resistance level of 51.67. Should that level fall, the next resistance level is 60.23.
bit.ly/1B5Z2pS

Events

Using LEAPS Options for a Long-Term Outlook
OIC
Some investors think of options only as a short-term instrument, but LEAPS options on stocks, indexes and ETFs have a timeframe that can approach two or more years! Join OIC to learn how LEAPS can be used on stocks, indexes and ETFs as we discuss how many of the strategies you currently employ could be used for a longer-term outlook using LEAPS options.
/goo.gl/Yf7Ta7

****SD: This is tomorrow at 3:30 p.m. – 4:30 p.m.

Miscellaneous

BP, a company with a split personality, looks to the future: Fuel for Thought
Nick Coleman – Platts
It is six years since a prominent newspaper dubbed BP’s chief executive the “most hated and clueless man in America” and in that time the company has paid $62 billion in fines and compensation for its role in the Macondo Gulf of Mexico oil spill. Perhaps surprisingly, much of the top leadership that visited the White House in 2010 to brief President Barack Obama remains in charge of the company. Among them are Bob Dudley, the then-director for Asia and the Americas and now CEO, together with Lamar McKay, head of BP America at the time and now Dudley’s deputy.
bit.ly/2dJ0aHU

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