It’s a Scary Time to Be Trading Wall Street’s Fear Index

Apr 23, 2018

Observations & Insight

Cybersecurity and Technology Upgrades – John Davidson, OCC

The OCC is in the process of making what is a big decision for a systemically important financial market utility (SIFMU) – how to best upgrade a tech stack responsible for clearing millions of options and futures contracts daily.

In this video from JLN’s annual series with industry leaders, OCC President and Chief Operating Officer John Davidson talks about how the OCC is weighing its cloud vendor options, addressing cybersecurity concerns and the regulatory initiatives on the road ahead.

Watch the video and read the rest here »


The Spread – Week of 4/16 to 4/20

The options industry just got a new jewel – MIAX announced it would launch MIAX Emerald last week. For more on that and other stories from last week, check out this new edition of The Spread.

Watch the video and see the stories referenced here »

Lead Stories

It’s a Scary Time to Be Trading Wall Street’s Fear Index
Gunjan Banerji – WSJ
Investors are starting to wonder if Wall Street’s fear gauge is broken.The Cboe Volatility Index tracks how much investors pay for options they often use as insurance against future stock-market declines. Known as the VIX, it typically rises as stocks fall or vice versa, reflecting shifting demand for options used to hedge investments. Playing the VIX has become a cottage industry in recent years, with billions of dollars flowing into investment products aimed at hedging or exploiting volatility trends.

Options Traders Pile Into $80 Oil Bets as Trump Wild Cards Mount
Alex Longley – Bloomberg
Traders are snapping up bets that Brent crude will rise to $80 a barrel as U.S. President Donald Trump mulls renewing sanctions on Iran while conflict roils parts of the Middle East.

****SD: From the article – “options markets show their strongest call bias since 2014.” In June of 2014, crude was trading north of $100. By September 2014 it was in the $90s. By the end of November 2014 it was trading south of $70. It wouldn’t be until the start of 2016 when the sub $30 bottom was found, but you get the idea.

Investors’ New Headache: It’s Getting Harder to Buy or Sell When They Want; Worsening liquidity comes as banks have reduced inventory of riskier assets and investors more closely track bond indexes
Gunjan Banerji and Sam Goldfarb – WSJ
Investors are having a tougher time trading in a number of financial markets, a development that is weakening their ability to raise cash or to protect against big stock declines.

****SD: For a specifically options liquidity-related story, see the piece from Robert Levy of Hanweck at TabbForum – Did Options Markets Dive Off A Liquidity Cliff Last Month? Reviewing the Data One Month Post-Vol Shock

Hedge funds make historic and increasingly desperate FX, bond bets
Jamie McGeever – Reuters
Hamstrung by a renewed slump in volatility and lack of clear market direction, FX and bond speculators are making historically big bets on a lower dollar and higher yields. It’s an increasingly desperate gamble, particularly on the dollar. Major exchange rates have been constrained within ever-narrowing ranges in recent weeks, and hedge funds’ record bet on the euro simply isn’t paying off.

A secretive high-speed trader is providing college kids with a ‘launch pad’ to build cryptocurrency companies
Frank Chaparro – Business Insider
Jump Trading is making cryptocurrency a big focus for its venture capital spin-off in 2018, and is bringing in college kids as part of the effort.

Exchanges and Clearing

Introducing the Cboe One-Year Volatility Index
Russell Rhoads – Cboe
April 2018 marks the 25th anniversary of the introduction of the Cboe Volatility Index (VIX Index) and during this month, information about the history of the VIX Index and the introduction of tradeable VIX products has been shared.
Twenty-five years after the launch of the VIX Index (which measures 30-day expected volatility of the S&P 500 Index), Cboe introduced a new volatility index – the Cboe One-Year Volatility Index (ticker: VIX1Y) – that measures that one-year expected volatility of the S&P 500 Index. This is the fifth volatility index based on SPX option pricing. All five volatility indexes are calculated using the VIX Index methodology and measure expected volatility over varying time frames. The table below identifies the indexes, the time frame covered by the indexes and their ticker symbols.

SGX-NSE: SGX To Migrate All Nifty Positions To New Indian Derivatives From June 4
Sajeet Manghat – Bloomberg
The Singapore Exchange on June 4 will migrate all Nifty and Bank Nifty positions of its clients to new contracts that will be settled every month on publicly available information after the National Stock Exchange decided to stop sharing data with it.
Participants who don’t wish to be part of this migration should close out their positions before June 1, SGX said in a communication to its clients. The exchange had earlier announced the launch of three new contracts on Nifty SGX India Futures, SGX Options on SGX India Futures and SGX India Bank Futures.


ION plans job cuts after beating Temenos with GBP1.5bn Fidessa offer; Trading technology is set for change with the combination of London-listed Fidessa and Ireland’s ION
Samuel Agini – Financial News
Fidessa, the London-listed trading technology company, has accepted a deadline-day bid from Ireland-headquartered ION Group, breaking a previous takeover agreement with Swiss firm Temenos.

Regulation & Enforcement

What will be the impact of physical delivery of stock derivatives?
Devangshu Datta – Business Standard News
The Sebi’s decision to make physical delivery of stock derivatives mandatory will have multiple knock-on effects across cash and derivatives segments. Many of those consequences would be negative.
India has an extremely active stock futures market, and a less-active but still-liquid stock options market, with all contracts cash-settled. High liquidity enables efficient price-discovery and leads to tight spreads between bids and asks.

Britain hails new optimism about Brexit deal for financial services
Huw Jones, Andrew MacAskill – Reuters
The British government and senior finance executives said they are increasingly confident Europe will offer financial companies generous market access after Brexit, boosting London’s hopes of retaining its status as a top global financial centre.


FlexTrade Launches FlexNOW Execution Management System (EMS) – One-Click Deployment System For Hedge Funds And Mini-Primes
Press Release
FlexTrade (@FlexTrade) today announced the official release of FlexNOW, an out-of-the-box, broker neutral EMS to address the needs of hedge funds and mini-primes who require a streamlined, multi-asset trading system at the click of a button.

Machine Learning: Unlocking the Power of Unstructured Data
Bruno Dupire, Bloomberg Professional Services – TABB Forum
Establishing a link between current observables and future behavior is a major undertaking in finance, and the field is embracing machine learning to tackle the task. Advances in machine learning and processing power mean it is now possible to process (and make sense of) vast amounts of unstructured data, which brings with it the potential to transform the industry.


Earnings: Volatility’s Siren Song—Save Yourself From Surprises
Thomas Preston – The Ticker Tape
Risky. Riskier. Riskiest. Nope, this isn’t a lesson on adjectives. But those three words describe three ways you might approach one of the more aggressive trading strategies out there: trading around corporate earnings. You might ask: How will a company’s numbers line up with expectations? Will they exceed or fall below those expectations, and by how much? How will the company frame future forecasts? A surprise in any of these areas can trigger a bullish or bearish price change that’s bigger than anyone expected, sending a stock dramatically higher or lower.

Fixing Losing Trades: Four Scenarios, Four Fixes
Kevin Lund – The Ticker Tape
So you have a loser, but don’t want to close it out. Maybe it’s a complex trade like an iron condor. Or maybe it’s a single long option. Or maybe it’s just stock. What can you do? First, don’t panic. Cooler heads prevail. Second, if you’re going to “fix” your trade, don’t wait until there’s nothing left to fix.


VIX 101: How the Volatility Gauge Works; The Cboe Volatility Index has become well known in trading circles as Wall Street’s “fear gauge”
Gunjan Banerji – WSJ
The Cboe Volatility Index, or VIX, has become well known in trading circles as Wall Street’s “fear gauge.” The gauge is supposed to be a barometer of investor expectations for stock-market turbulence 30 days out in the future. Here’s how it works: it takes the prices for a wide range of S&P 500 index options contracts, then inputs the prices into a complex formula that generates its level.

Time Decay: Tick-Tock
Sage Anderson – tastytrade blog
When dealing in options, a paramount aspect of every trading decision involves time until expiration. At tastytrade, we often refer to this factor as “days-to-expiration,” or DTE for short.

How to Trade Options on Futures
Jayanthi Gopalakrishnan – TD Ameritrade
For many, futures options have a certain mystique thanks to their steeper learning curve and pricing structures. But futures options can be accessible, tradable, and not as confusing as they look.
If you trade equity options, you’re likely already versed in the mechanics of various options strategies and the math involved. With a little effort, you can get outside your comfort zone and wrap your mind around the specifics. Unlike equity options, futures options are priced differently.


In a Volatile 1st Quarter, CME Group Might Be the Big Winner
David Borun, Zacks via Nasdaq
The first quarter of the year was a real roller coaster ride in the U.S. equity markets. A big run-up in January was followed by an even bigger slide in February. After peaking at 2782 on January, the S&P 500 index plunged to 2581 on February 8th. Unfortunately, the nauseating ride wasn’t over and we saw several more large daily moves throughout February and March that helped move the CBOE volatility index (VIX – the market’s “fear gauge”) to a peak of 37 – a multi-year high.

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