JLN Options Newsletter — Bearish Housing Bets Building on Interest Rate Concerns; Taking Stock of Risk in a High-SKEW Environment; What to do in a world of rising volatility

Sep 24, 2014

Observations and Insight


Julie Winkler, Senior Managing Director of Research and Product Development at CME Group – Innovation in the Futures Industry

“You can’t keep doing the same thing. You need to figure out different ways to innovate, different ways to collaborate…and by doing so, that’s how you come up with some breakthrough innovations.”

Einstein’s definition of insanity was repeating the same task over and over and expecting a different result each time. Julie Winkler of CME Group explains how innovation in the financial industry must also avoid repeating the same process over and over again in order to create change. Winkler defines innovation and gives examples of how companies like CME Group have been pioneers in their field. She also discusses designing successful new products and how innovation can start at the internship level.

Watch the video »

 Lead Stories

Bearish Housing Bets Building on Interest Rate Concerns
Callie Bost – Bloomberg
Traders are accumulating options to protect against losses in an exchange-traded fund that tracks housing stocks, speculating the homebuilding recovery may be threatened by an increase in interest rates.
The cost of puts conveying the right to sell the SPDR S&P 500 Homebuilders (XHB) exchange-traded fund reached the highest level in 14 months relative to bullish contracts, according to three-month data compiled by Bloomberg.

Taking Stock of Risk in a High-SKEW Environment
Adam Warner – Schaeffer’s Investment Research
Mind if I ask SKEW a question?
OK, sorry; that’s a horrible joke. I dredge it up because, as Bloomberg notes, the CBOE SKEW Index (SKEW) is partying like it’s 1998:

What to do in a world of rising volatility
KirkSpano – MarketWatch
Since the Flash Crash of 2010 and the wild swings of 2011, stock-market volatility has generally drifted downward the past three years. In 2014, as measured by the CBOE Volatility Index (VIX), we’ve seen one of the most subdued markets in a long time. In July, volatility hit the lowest levels since before the financial crisis.According to Grantham, the decrease in volatility would imply that investors have generally felt very comfortable with their evaluations of what stock-market assets are worth. With the end of quantitative easing (QE) by the Fed, though those assessments will likely become less certain and volatility will increase.

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Alibaba investors have reason to worry, say analysts
Tang Jiajie – MarketWatch
After two weeks of road shows in cities in the U.S. as well as in Hong Kong and Singapore, e-commerce giant Alibaba Group Holding Ltd. finally held its initial public offering on the New York Stock Exchange (NYSE).The IPO raised $21.8 billion. The company’s share price surge 38% to $93.89 on its Sept. 19 debut under the ticker symbol BABA. The overwhelming demand promoted underwriters to exercise an option to sell an additional 48 million shares, raising the total value of the fundraising to $25 billion, a world record.

OTC energy derivatives did not cause the crisis
Mark Pengelly – Risk.net
The 2008 financial crisis had many causes: herding behaviour, a culture of runaway debt, terrible risk management, second-class regulation and the search for ever-greater returns by foolish investors, to name but a few. But in the popular narrative, much of the blame will always be attributed – rightly or wrongly – to over-the-counter derivatives.

Energy Risk Asia Derivatives House of the Year: Citi
With other banks pulling back, Citi’s commitment to physical trading – as well as its comfort taking exotic and illiquid risk – is highly prized by Asian clients.
The list of Asia’s top commodity dealers has been re-written in recent years, with some of the largest investment banks slimming down or closing desks completely due to falling revenues and regulatory pressure.

Energy Risk Asia Broker of the Year: GFI Group
Despite a difficult year for commodity brokers, GFI Group is demonstrating continued commitment to some of Asia’s more specialised commodity markets.
Tougher regulation and the departure of many banks from commodities are causing headaches for commodity brokers. Faced with this glum backdrop, a natural reaction might be to pull out of smaller or less profitable areas. But during the past 18 months, New York-based GFI Group has demonstrated a continuing commitment to some of Asia’s more specialised markets, including iron ore, steel and Australian power and gas.

Energy Risk Asia Oil & Products House of the Year: JP Morgan
Despite the sale of its physical commodities business, JP Morgan continues to offer liquidity in a broad range of crudes and refined products in Asia.
One of the biggest stories about JP Morgan this year was the bank’s decision to sell its physical commodities business to Switzerland-based trading house Mercuria – a deal agreed in March. The transaction had not yet closed as Energy Risk went to press, but even after it is completed, JP Morgan is likely to remain a major player in Asian oil and products.


Nasdaq to administer data system behind three-hour trading halt
Herbert Lash – Reuters
Nasdaq OMX Group Inc (NDAQ.O) won a contract to administer billing and other chores for the data feed system that sparked a three-hour trading halt in Nasdaq-listed stocks last year, but a contract to build and manage the system is still undecided, the firm that oversaw bidding said on Tuesday.
Representatives from the U.S. stock exchanges and the Financial Industry Regulatory Authority, a self-funded watchdog for Wall Street, picked Nasdaq over two other firms that submitted bids, said Jordan & Jordan in a news release.

Intercontinental Exchange Announces Approval of ICE Trade Vault by Ontario Securities Commission
Press Release (Intercontinental Exchange)
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, announced today that the Ontario Securities Commission (OSC) approved ICE Trade Vault as a Canadian Trade Repository to serve the commodity, credit and foreign exchange asset classes. ICE Trade Vault will seek trade repository registration in Alberta once the provincial rules are finalized.

Energy Risk Asia CCP of the Year: Singapore Exchange
Singapore Exchange is trying to ease the regulatory burden on both Asian and non-Asian traders by ensuring they can continue to transact where and how they want The importance of central counterparties (CCPs) has grown in the years following the 2008 financial crisis. At a summit in Pittsburgh in 2009, leaders of the Group of 20 countries called for rules requiring over-the-counter derivatives to be centrally cleared and reported to trade repositories. But different countries have woven these principles into law in varying ways, giving rise to overlapping and sometimes contradictory requirements. As a result, exchanges and CCPs catering to a global clientele must deal with a complex web of related national rules.

Regulation and Enforcement

Cross-Border Swap Dispute Risks Trade War, CFTC’s Giancarlo Says
Silla Brush – Bloomberg
U.S. and European regulators risk a permanent breakdown in financial markets if they can’t end a dispute over transatlantic oversight of the $700 trillion swaps industry, a Commodity Futures Trading Commission member said.
J. Christopher Giancarlo, in his first speech since joining the CFTC in June, said the U.S. agency should retract some of its overseas policies to boost coordination with Europe and prevent a trade war that would imperil economic growth.

FINRA algo supervision could be “costly and ineffective”
John Bakie  – The Trade
Tighter rules on the development of execution algorithms in the US could put further cost pressure on the sell-side without improving market stability, experts warn.
On Friday, the Financial Industry Regulatory Authority’s (FINRA) board approved a series of new rule changes focused on high-frequency trading (HTF) and algorithmic trading. FINRA is responsible for the oversight of securities dealers and exchanges in the US, with the remit to protect investors and ensure markets remain free, open and fair.


Don’t Miss the Next Volatility Wave
One of the most dominant narratives today is that stock market volatility has gone completely away and is never returning. Is it true?A research paper titled, “Stock Market Volatility during the 2008 Financial Crisis” by Kiran Manda at the Stern School of Business, New York University observed:

Options Education

Risk Management is Critical To Survival in Trading Options and Stocks
Bob Lang – CBOE Options Hub
There is a great story of luck and persistence about  Jack ‘Treetop’ Strauss.   A towering figure, Strauss was an accomplished poker pro.  In 1982 he was playing in the World Series of Poker, having made his third final table of his career (he finished second to legend Johnny Moss in 1971).  So as legend has it, during the second day of the tournament he was heads up (one – one) in a huge pot and after the last card was dealt he pushed all of his chips into the pot on a bluff.  His opponent called and it appeared Strauss was finished, but as he stood up and put on his coat and readied to leave he noticed a chip underneath a napkin.  Since he did not declare ‘all in’ during the hand the officials allowed him to stay and play the ONE chip — Jack was back in the game!


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