Inflation Readings Jolt Options Market

Jun 23, 2021

Observations & Insight

****SC: Laura Morrison, Cboe senior VP and global head of listings, on Thursday hosts options trader and educator Jon Najarian, Innovator ETF CEO Bruce Bond, and Innovator VP of research Graham Day for an online chat on the outlook for the second half of 2021 and options strategies to enhance returns. More information is here.


****Thom Thompson: Our friends over at Katten Muchin have written a note about a case alleging market manipulation that is proceeding in federal court in New York. The case, which a federal appeals court is allowing to go forward, was brought against Credit Suisse for its hedging activities in the VIX futures during February 2018’s “Volmageddon.” Credit Suisse was an issuer of notes tied inversely to the VIX, and Credit Suisse seemed to think that its prior disclosure of its hedging activities inoculated it from concerns about the effects of its trading on market conditions. The district court agreed with Credit Suisse, the circuit court disagreed and now the case goes forward. Read Katten’s note here

Lead Stories

Inflation Readings Jolt Options Market
Gunjan Banerji – WSJ
The options market has started to price in a higher likelihood of a big drop in the S&P 500 on several occasions over the past year, according to Societe Generale analysts:
-Before the U.S. presidential election
-Around the initial GameStop frenzy in January
-When fresh inflation data was released in May, showing consumer prices surged by the most in any 12-month period since 2008
More inflation data could shock the market, and lead traders to bet on a higher probability of a selloff in the S&P 500, the analysts wrote recently.

Nasdaq Hits Record as Stocks Push Higher
Will Horner and Michael Wursthorn – WSJ
U.S. stocks rallied again Tuesday and the Nasdaq Composite closed at an all-time high as investors waded into shares of technology and other growth stocks.
Most major stock sectors rose Tuesday, extending the sharp gains indexes enjoyed a day earlier. Shares of big tech companies, though, appeared to get the most attention from investors. Stocks like Twitter, Netflix and Facebook all soared Tuesday, while Microsoft ‘s market cap briefly rose above $2 trillion and came within striking distance of its first closing record since September.

Downward spiral in liquidity is leading to more market shocks
Rishabh Bhandari – Financial Times
Broad market liquidity — the ease with which investors can buy or sell a security without affecting its price — has been in a downward spiral for more than 10 years.
Look, for example, at what has happened to trading in futures contracts on the S&P 500 index — typically the world’s most liquid equity index futures. Over the past decade their liquidity, as measured by market depth, has collapsed by around 90 per cent. This pattern is repeated across asset classes and regions.

Why There Is No ‘Taper Tantrum’ This Time Around
Jon Hilsenrath and Sam Goldfarb – WSJ
The taper tantrum has become taper tranquility.
When Federal Reserve officials started talking about pulling back on the central bank’s easy-money policies back in 2013, anxious investors sent markets into a tizzy. Yields on Treasury bonds rose, emerging-markets stocks tumbled, junk bond prices fell and stock volatility jumped, all in what came to be known as a market “taper tantrum” that preoccupied the Fed for months and played a role in delaying its plans.

The Russell 2000 Index Reconstitution: Because Markets Change
Payal Shah – CME Group OpenMarkets
The Russell Indexes are among the most widely used benchmarks for measuring U.S. share performance
FTSE Russell reconstitutes its indices each June, which presents risk management challenges for some and potential alpha trade opportunities for others
Why Index Reconstitution?
The U.S. equity market is the largest publicly traded securities market in the world. The rebalance happens, simply put, because markets change and evolve. The annual reconstitution ensures that the Russell U.S. Indexes are recast to reflect changes in the U.S. equity markets over the preceding year in accordance with the transparent, public, rules-based methodology.


Micro E-mini Equity Options Surpass 1.5 Million Contracts Traded
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that its Micro E-mini Equity options surpassed 1.5 million contracts traded on Friday, June 18.
Options on Micro E-mini S&P 500 and Micro E-mini Nasdaq-100 futures were introduced in August 2020 to build on the strength and liquidity of CME Group’s suite of Micro E-mini Equity futures on the S&P 500, Nasdaq-100, Russell 2000 and Dow Jones Industrial Average indices. Since their May 2019 launch, more than 800 million combined Micro E-mini Equity futures contracts have traded across all four indices.

Dipping into the DIPS. The growing importance of dividend derivatives
Dividend derivatives have been one of the Eurex success stories ever since the launch of the EURO STOXX 50 dividend future in 2008. The dividend segment has since grown into a vast offering of more than 80 different products. In a recent webinar, panelists from Eurex, IHS Markit and BNP Paribas discussed the growing importance of the products and shed some light on the outlook for dividends for 2021 and beyond in a post-pandemic world.

Regulation & Enforcement

Archegos Blowup May Lead to Supervisory Response, BOE Says
Silla Brush – Bloomberg
The Bank of England’s top banking regulator said the $10 billion meltdown of Archegos Capital Management was “extraordinary” and may lead to supervisory fallout around the world.
Sam Woods, head of the BOE’s Prudential Regulation Authority, told U.K. lawmakers on Wednesday that British regulators’ probe into the collapse would likely conclude within the next month.

SEC chief focuses on zero-commission trades and SPACs, rather than crypto in speech
Chris Matthews – MarketWatch
Securities and Exchange Commission Chairman Gary Gensler remained focused on issuing new regulations related to zero-commission trading platforms rather than the crash in cryptocurrency prices in June, which by late Monday had led to the evaporation of roughly $1.3 trillion in wealth, two public appearances on Wednesday suggest.
The U.S. regulator is concerned about zero-commission trading platforms that send retail customer orders to market makers in exchange for so-called payment for order flow, a controversial system that critics say creates a conflict of interest between those brokers and their customers. Though the practice has been around for a while, it has become increasingly widespread after online broker Robinhood began to offer free trading in 2014.

Assets Worth Trillions Need More Sunlight, SEC’s Gary Gensler Says
Benjamin Bain, Jonathan Ferro and Tom Keene – Bloomberg
Trillions of dollars in assets need more sunlight and may require tighter rules, a problem highlighted by this year’s disruptions in financial markets, Securities and Exchange Commission Chair Gary Gensler said Wednesday.
Gensler, speaking in a Bloomberg Television interview, said he’s directed the agency’s staff to review how to toughen a slew of regulations that touch everything from meme stocks to blank-check companies. He made clear that the SEC could also do more to keep tabs on large asset managers — an issue underscored by the March collapse of Archegos Capital Management.


Opportunities to Harvest Volatility During the Annual Russell Reconstitution
Rick Rosenthal – Cboe
June marks the 33rd Annual Russell Reconstitution, which is the process of determining which constituents will be added or deleted from their respective U.S. Russell Indices. The annual reconstitution leads to a surge in trading, presenting unique opportunities for market participants to leverage Cboe’s Russell 2000 Index options products.
What is Russell Reconstitution?
FTSE Russell Indices are reconstituted over a multi-week process in accordance to its benchmark methodology on an annual basis. The reconstitution reflects changes from the preceding year by adding and removing shares of companies to the U.S. Russell Indices.

As Volatility Returns, Hedge International Equities with ‘HFXI’
ETF Trends – Nasdaq
Volatility is making an unwelcome comeback as global economies continue to re-open, highlighting the importance of hedged assets like the IQ 50 Percent Hedged FTSE International ETF (HFXI).
“Volatility is back for global stock markets, triggered by uncertainty over central banks’ plans for monetary policy and rising Covid-19 cases around the world,” a CNBC report said.


CME Group and Mayor Lightfoot Award Scholarships for Star Scholars to Continue Education at Four-Year Colleges and Universities
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, and Chicago Mayor Lori Lightfoot have awarded 25 Star Scholars with scholarships towards earning a degree at a four-year college or university. The award recipients recently graduated from City Colleges of Chicago with an associate degree and will receive a $5,000 scholarship from CME Group to continue their education, helping create more equitable opportunities for hardworking students in Chicago.


Crypto Volatility Tokens Let Traders Profit From Turbulent Markets
Nicholas Pongratz – Yahoo Finance
Fintech platform COTI is launching volatility tokens on decentralized exchanges (DEX) to enable the trading of crypto market volatility.
Users can now buy a volatility token long on a DEX, if they think volatility will increase. Conversely, users can sell a volatility token if they think volatility will decrease. Some tokens even have leverage already built into them.

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