Observations & Insight

CME Group’s WTI Weeklys On a Roll
Spencer Doar – JLN

Over the past few years, weekly options have become a prominent portion of CME Group’s activities in financial asset classes. Jeff White, executive director energy products and services at CME, said the weeklys trend is catching hold in commodity assets. WTI weeklys have been a particular bright spot and last week’s OPEC meeting helped the exchange set a couple of records:

1) single day volume record of 12,129 weeklys and
2) single day open interest record of 17,106

(Click for larger image)

Image courtesy CME Group

White pointed to some reasons for the growth. First, WTI options have record electronic participation this year — 80 percent electronic execution — and that screen liquidity is alluring. Two, firms that don’t traditionally trade energy are growing more comfortable moving into the market. Three, there is always weekly information released pertinent to the state of oil markets (inventories, rig counts, etc. plus occasional developments like those from OPEC last week), and traders are looking for more precise means to hedge. Four, retail traders are increasingly participating in futures/futures options markets.

Natural gas options are also of note as, per the CME’s most recent monthly options report, they “continue to transition to the screen with a record 44% of LN options traded electronically (screen ADV of 43k, +150% YoY).” This increase in screen liquidity, much like in WTI weeklys, sets the table for quicker growth of volumes.

None of those catalysts seem like short term trends, so look for the continued growth of weekly options in the CME’s energy products.


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NYSE Options’ Brown Discusses the Road Ahead

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In this video from the Options Industry Conference in Scottsdale, Ariz., Ivan Brown, senior director, head of options at NYSE, sat down to discuss the initiatives the exchange has in place. Brown talks about balancing incentives for market makers, the rollout of a new order entry system, NYSE Options IMprint, and the eventual transition of NYSE options markets to NYSE Pillar, the exchange’s new matching engine, among other topics.

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Lead Stories

Iraq may consider hedging crude production
Iraq may look at hedging part of its crude oil production, the head of the OPEC member’s oil marketer SOMO said, as a way to protect government revenue against the risk of oil price volatility. “It is in our strategy in the future that maybe we will consider hedging part of Iraqi crude … SOMO is floating an idea now and this is yet to be studied,” Falah Al-Amri, who is also Iraq’s OPEC governor, told Reuters in an interview.

****SD: Bloomberg on the subject here. This would be bigger than the Mexican oil hedge which in turn would be big for oil derivatives. After all, in Bloomberg’s great April longform on Mexico’s “Hacienda hedge”, there’s an anecdote about banks at one point receiving orders for $1.5 billion in options representing 330 million barrels.

Complexity In Funds Will Cost You
Larry Swedroe – ETF.com
NASCAR racing automobiles are very sophisticated and complex automobiles. In the hands of a Mario Andretti, they are capable of great feats. The same machine in the hands of a drunk driver, however, is a very dangerous vehicle.
Complex financial strategies and instruments such as short selling, derivatives (such as options) and the use of leverage are the financial equivalents of racing cars—they are dual natured, with the ability to either lead funds to safety or to greater risk-taking.

Volatility Is Low-But Not As Low As You Think
Alliance Bernstein – ValueWalk
Stock market volatility is unusually low these days. Does that mean investors are complacent? We don’t think so. In fact, some risk indicators suggest market participants may be less relaxed than they seem.

Gulati’s Hedge Fund Pummeled as Equity Markets Evade Volatility
Nishant Kumar – Bloomberg
Argentiere hedge fund lost money for 14 successive months; Fund bets that volatility is mispriced, given uncertainties
It’s been a long and painful year for hedge fund manager Deepak Gulati, who finds himself on the wrong side of one of the most profitable trades in town.

Pre-OPEC short covering left oil price poised to fall
John Kemp – Reuters
Hedge fund managers had already closed out many of their bearish short positions in crude oil before OPEC and non-OPEC ministers met in Vienna on May 25, according to data from regulators and exchanges.
The bout of short-covering explains why oil prices rose consistently in the run up to the meeting, then sold off sharply afterwards when ministers decided to leave output quotas unchanged.

Securities firm puts options on the table
Brian Ng – Phnom Penh Post
Phnom Penh Securities is offering put and call options to its clients after becoming the first securities firm in the country to sell options on equities through a new partnership with US-based electronic brokerage Interactive Brokers.

Exchanges and Clearing

Commexes developing tradable indices to be future ready
Business Standard News
The Multi Commodity Exchange (MCX) and National Commodity and Derivatives Exchange (NCDEX) have started developing indices for trading in derivatives. This comes after the Securities and Exchange Board of India’s decision to allow options trades in commodity derivatives. The exchanges hope Sebi will, in time, permit derivatives based on commodity indices and index-based products, like exchange traded funds.

Early market loss taught CME Group CEO Terry Duffy discipline
Gail MarksJarvis – Chicago Tribune
Just like a proud mother covers her fireplace mantel and living room walls with family photos, Terry Duffy’s CME Group office is filled with photos of himself and politicians.
There are the Bushes — former Presidents George H.W. and George W., as well as Jeb — plus a framed, handwritten note from George W. Bush commenting on the golf game he played with Duffy in April. Duffy says they’ve been friends for years. The menagerie also contains Democrats and celebrities — from Bill and Hillary Clinton to Mark Wahlberg and Drew Barrymore.

Draghi Says Clearing Oversight After Brexit Is `Crucial’ for ECB
The European Central Bank needs to maintain a firm grip in overseeing clearing of trades in euro-denominated financial instruments after Britain leaves the European Union, President Mario Draghi said on Monday.


ISDA has appointed HSBC’s derivatives market infrastructure expert to head up its clearing initiatives.
Joe Parsons – The Trade
The International Swaps and Derivatives Association (ISDA) named Ulrich Karl as head of clearing services, where he will organise and lead its clearing initiatives and regulatory agenda.

Departures signal a changing of the guard in HFT; Quantlab’s Smith is looking for ‘fun’ elsewhere and he is not the only one
Nicole Bullock – FT
For a decade, high-frequency trading was the hottest ticket in town. Then it was reviled as the scourge of Wall Street. Now some key figures from the generation that helped define it are on the move.

Regulation & Enforcement

CFTC proposal holds harsh surprise for asset owners
Rick Baert – Pensions and Investments Online
A little-publicized part of the latest CFTC proposal for speculative position limits on certain physical commodities could make it difficult for asset owners to comply.


It’s Time for Investors to Pounce on Banks
Steve Sears – Barron’s
The financial sector, lately derided as dead money thanks to President Donald Trump’s political troubles, is approaching a Lazarus-like moment. By June 30, as part of its annual Comprehensive Capital Analysis and Review, or CCAR, the Federal Reserve will announce whether it has approved bank plans to increase stock dividends and buybacks. That could send stocks higher, surprising investors who have mostly viewed bank stocks as stalled since the Department of Justice decided to investigate whether the Trump campaign colluded with the Russian government.

History Says Emerging-Market Carry Trade Could End in Tears
Natasha Doff – Bloomberg
Investors reaping handsome returns on emerging-market currencies this year might do well to heed a warning once made by Harvard economist Jeffrey Frankel, who likened carry trading to “picking up pennies in front of a steam roller.”

****SD: One bit from the story: “the ruble is ‘by far the most consensus trade’ in Eastern Europe, the Middle East and Africa, and BofA is using options to bet the Russian currency will decline amid oil-price fluctuations

June’s Low-Volatility Grind Provides Options Trading Opportunities
Bernie Schaeffer
The summer months in the stock market are somewhat notorious for sluggish price action. And last year’s Brexit shock notwithstanding, the upcoming month of June typically lives up to this stereotype in superlative fashion.

Neuberger put option funds aim to mitigate volatility
Jessica Tasman-Jones – Fund Strategy
Neuberger Berman has launched to alternative investment Ucits that aim to deliver equity-like returns, but with lower volatility and stronger downside protection through put options.

****SD: Everybody’s getting in on options funds.


Weekend Review of Volatility Indexes and ETPs – 5/22/2017
Russell Rhoads – CBOE Options Hub
VXST closed Friday at an all-time low of 7.60 which sounds impressive until you hear that for VXST the history we have to work with only goes back to 2011. I am going to make a bold prediction and say that VXST will move higher when the market reopens on Tuesday. Read that as sarcasm as VXST has never followed a three-day weekend without moving higher.

Weekend Review of VIX Options and Futures – 5/22/2017 – 5/26/2017
Russell Rhoads – CBOE Options Hub
VIX finished the week at 9.81, just a tad above the post 2008 lows put in earlier this month. The June 2017 VIX cycle is five weeks long so there’s still plenty of time until June 21st expiration. The result is one of the steepest curves a can recall in the six years of posting these weekend blogs.

Weekend Review of Russell 2000 Options and Volatility – 5/22/2017 – 5/26/2017
Russell Rhoads – CBOE Options Hub
Large cap dominance continued last week as the Russell 1000 (RUI) gained 1.41% last week outdoing the Russell 2000 (RUT) performance of 1.09%. For the year RUI is just a little under 6% ahead of RUT.


How the laid off 40-something traders came back into fashion
Research firm Coalition calculates that banks’ revenues from trading G10 rates products fell 51% between the first quarter of 2012 and the first quarter of 2014. By early 2015 senior rates salespeople were as popular as a meat sausage at a vegan picnic. Banks like Credit Suisse set about culling their rates desks; directors and managing directors flooded onto the market. Two years later, times have changed.

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