Volatility Update Heading into Summer: Low Vol, Double Calendars
The Ticker Tape
The 1941 comedy film “Sullivan’s Travels” featured a popular director named John L. Sullivan who had achieved a great degree of success producing whimsical comedies like the 1939 film Ants in Your Plants. Despite his achievements, Sullivan wasn’t totally satisfied with his work. So he asked his boss if his next project could be a rather serious story about the plight of the poor and downtrodden of the day. The film he wanted to produce would be an adaptation of a fictional book titled O Brother, Where Art Thou. If there are poor and downtrodden players in the options market in recent weeks, it might be the volatility traders, because the recent grind higher in the S&P 500 has been slow and methodical.
****SD: I highly recommend “Sullivan’s Travels” to any cinephiles out there who haven’t had the pleasure. If you like Joel McCrea and haven’t seen him in Alfred Hitchcock’s “Foreign Correspondent,” put that on the watchlist, too. Although, from my recollection, that film couldn’t function as an options story lede like “Sullivan’s” can…
Indicator of the Week: Should You Sweat the VIX Spike?
The CBOE Volatility Index (VIX) uses S&P 500 Index (SPX) options to show the market’s expectation of volatility in the next 30 days. Because volatility rises most during sharp downturns, the VIX is often referred to as the market’s “fear gauge.” In a little more than a week, the VIX has spiked more than 50%, indicating heightened fear. However, I’m wondering if this spike is really justified. The SPX over that same time fell less than 1%. What do these VIX spikes tell us about the market going forward?
****SD: For comparison, here is the link to the chart of Bats’ new(ish) T3 SPY Volatility Index, otherwise known as SPYIX.
US Futures Off to Torrid Start in 2016
The 2016 US futures and options on futures markets are off to a torrid start and look set to surpass last year’s record volume of 3.2 billion contracts. Trading volume in Q1 2016 is projecting a year-over-year increase of 15.1%, to a record 3.7 billion contracts, as volume in January, February and March 2016 surpassed each January, February and March since 2012.
****SD: “Torrid” in a good way.
Inside The Monster VIX Rally: Market Stats & Returns
See It Market
While stocks have hit the skids a bit in the past few days, by comparison, volatility expectations have soared by an unprecedented amount. So how does the monster VIX rally stack up historically? How have stocks behaved after similar instances?
Fearful for Longer: Market’s Fear Gauge Signals Investors Expect Volatility to Last
The futures market is signaling that a recent jump in stock-market volatility is here to stay, as investors grapple with a British vote next week on whether to leave the European Union. The CBOE Volatility Index, or VIX, jumped Thursday morning to as high as 22.86, levels last seen in February. That comes after a 43% surge on Friday and Monday, its biggest two-day gain since last August.
Why China needs more hedging tools for foreign investors
International Financial Law Review
Market participants have expressed concern about the lack of hedging tools available onshore for foreign investors tapping China’s domestic derivatives market. The People’s Bank of China (PBOC) moved in February to exempt all foreign institutional financial investors (FIIIs) permitted to invest in the China interbank bond market (CIBM) from all quotas.
S&P Dow Jones Indices Index Dashboard: Risk & Volatility June 16, 2016
Brexit risk has spooked the markets; with large moves telegraphed by volatility gauges for European equities and the British pound. Nearly all our reported volatility measures are up, with VIX breaking above 20 for the first time since February. Continued range-trading in U.S. equities and the currently elevated levels of implied volatility may suit buy-write strategies in the short term.
Five Questions With Anthony Crudele
Trade Talk, Trading Technologies Blog
Anthony Crudele started on the trading floors in 1995 when he was 18 years old, and by the time he was 21, he had become one of the youngest members of the Chicago Mercantile Exchange. He started his trading career in the S&P 500 pit and was one of the very first people to trade the E-mini S&P 500. Today, he hosts a weekly podcast called Futures Radio Show where he shares his extensive experience as a futures trader and interviews expert guests who provide insight into what’s happening in the markets
SPXW Wednesday-Expiring Weekly Options Volume Grows to More Than 100,000 Per Day
CBOE Options Hub
On February 23, 2016, CBOE launched trading of weekly options on the S&P 500 Index which expire on Wednesdays. The average daily volume for SPXW Wednesday-Expiring Weekly Options grew from 74,114 in May, to 105,768 so far this month (through June 14).
Five hurdles that can still scupper the LSE merger (and stop its French boss pocketing a GBP14m payday)
Daily Mail Online
There have been months of clandestine meetings, multi-million-pound fees for advisors and a public relations blitz. Now the bosses behind a German takeover of the London Stock Exchange are increasingly confident their GBP21billion deal will go ahead. Both LSE and Frankfurt-based Deutsche Boerse call it a ‘merger of equals’ – but the new company will be led by German chief executive Carsten Kengeter and report profits in euros. Deutsche shareholders will get a 54.4 per cent controlling stake.
Regulation & Enforcement
OCC Comments Regarding the Adoption of an Options Exchange Risk Control Standards Policy
The Options Clearing Corporation (“OCC”) submits this letter in response to comments of market participants on its recent proposal regarding the adoption of an Options Exchange Risk Control Standards Policy (“Policy”). OCC’s Policy would address risks from erroneous transactions that are executed on an options exchange that has not demonstrated the existence of certain risk controls (“Risk Controls”) that are consistent with a set of principles-based risk control standards (“Risk Control Standards”) developed by OCC in cooperation with the options exchanges. For any options contract cleared by OCC that is executed on an options exchange that has not demonstrated Risk Controls consistent with the Risk Control Standards, OCC would charge and collect from the Clearing Members a fee of two cents on each side of the contract (“Fee”).
Where’s the CFTC’s Head AT?: Fools Rush in Where Angels Fear to Tread
The CFTC is currently considering Regulation AT (for Automated Trading). It is the Commission’s attempt to get a handle on HFT and algorithmic trading. By far the most controversial aspect of the proposed regulation is the CFTC’s demand that algo traders provide the Commission with their source code. Given the sensitivity of this information, algo/HFT firms are understandably freaking out over this demand. Those concerns are certainly legitimate. But what I want to ask is: what’s the point? What can the Commission actually accomplish? The Commission argues that by reviewing source code, it can identify possible coding errors that could lead to “disruptive events” like the 2013 Knight Capital fiasco. Color me skeptical, for at least two reasons.
****SD: One thing to keep in mind is that CFTC Commissioner Giancarlo Opposes Reg AT Source Code Provision
Using ETF Options To Harvest Income And Manage Market Volatility
In this year’s stampede to protect portfolios and generate income, options on exchange traded funds are booming. It’s not just traders and institutional investors who are stoking demand for these more sophisticated investment strategies. There’s rapidly growing interest from individual investors and financial advisors too, said Frank Tirado, vice president of the Options Industry Council (OCC).
****SD: From Zacks: Market Fears Brexit: Volatility ETFs Take Full Advantage
As ‘Brexit’ Vote Looms, Goldman Offers a Trading Strategy for U.S. Stocks With U.K. Ties
Concerns about the possibility of the U.K. leaving the European Union have surfaced with a vengeance in recent trading sessions, sparking selloffs in major indexes around the world and boosting the U.S. stock market’s closely watched “fear gauge.” But in an interesting twist, those same fears haven’t spurred elevated demand for options that protect against declines in specific U.S. stocks with high exposure to the U.K., according to Goldman Sachs.
Traders bet big that Apple is set to rise 36 percent
Apple bulls appear to be taking to the options market to place long-term bets on the stock. Over the past few days, there has been a considerable increase in positions in the Apple 130-strike call option expiring in in January 2018. About 10,000 of these contracts have been purchased in the past few sessions, representing positions on some $100 million worth of Apple shares.
How to Profit From Brexit: A Leveraged Gold Trade
Investors are voraciously buying calls on the SPDR Gold Trust (ticker: GLD ) in apparent anticipation that the United Kingdom will vote later this month to leave the European Union. If Europe’s economic confederacy is weakened, global markets and currencies could be thrust into chaos, which makes gold, the feel-good asset in times of financial duress, a raging hot trade ahead of the June 23 “Brexit” vote. The logic of the trade is simple, at least for hedge funds and other professional investors. They are buying SPDR Gold Trust calls – essentially a leveraged bet – that the exchange-traded fund price surges on Brexit.
High Yield Hedging SWAPs Vs Listed Derivatives
With the global search for yield compressing interest rates on high yield bond, potentially acting like a market rubber band about to break, how does one hedge in such an environment? In a presentation to be given Thursday at the American Advisory Council, Barclays analysts Arik Ben Dor and Jingling Guan will consider the questions of passive versus dynamic approaches and bank SWAPs versus equity futures among other issues, according to slides reviewed by ValueWalk. While some bank research has indicated the need for such hedging tactics, other bank research has debated this point.
Earnings Next Week – 6/20 – 6/24
CBOE Options Hub
It is a very quiet week for earnings enthusiasts as only four companies with short dated options will be reporting earnings. As always the data below is based on the last three years of earnings results. The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings.
Understanding Implied Volatility vs Historical Vol & Options Strategy
The Ticker Tape
Implied volatility is like gravity. You can’t directly observe it, but you know it’s there and it’s measurable. And it’s pretty important, too. Just as gravity impacts our daily lives, implied volatility is a critical ingredient in options pricing. And “what’s priced in” is a key factor in whether your options trade is profitable.