Observations & Insight

The Out of Options Motorcycle Club to Ride to Miami to Options Industry Conference
John Lothian – JLN

The Out of Options Motorcycle Club comes together to raise money by doing a charity motorcycle ride to the options conference. The group is riding for this year is the Babies Heart Fund, which supports the pediatric cardiology division at Columbia where ISE’s Molly McGregor’s son is a patient. She credits them with saving Nathan’s life and says the research they are doing now is simply amazing. The group is also riding for cancer research at St. Jude’s, an equally important cause and an amazing institution.

From Bill Ryan of NYSE

I am sending this message on behalf of the Out of Options Motorcycle Club members Paul Jigani, Barry Nobel and Joe Valenza.

As many of you are aware, Michael Brady, the grandson of Tom Brady, a legend in the options world for many years, was diagnosed with cancer and was treated at St Jude Children’s Research Hospital with great results. Many of you may not know that Molly McGregor, who oversees communications and marketing for ISE and is a member of the OIC Roundtable, has a cause that is near and dear to her heart and that of her young son Nathan. Nathan was born with two Critical Congenital Heart Defects (CCHDs, affect 1 in 10,000 babies). Nathan is doing well now thanks to the amazing efforts of the Columbia University Medical Center and their team of pediatric cardiologists.

Read More –> http://jlne.ws/1DTS7Nd

Lead Stories

After remaking CME, Donohue is at it again, at OCC
Joe Cahill – Crain’s Chicago Business
Craig Donohue’s measured, lawyerly words make it easy to forget he’s once again at the center of turbulent change in Chicago’s exchange industry.
Yet that’s where he finds himself three years after retiring as CEO of CME Group, owner of the Chicago Mercantile Exchange, Chicago Board of Trade and other trading venues. Now he’s running Options Clearing Corp., a once-obscure organization that guarantees, or “clears,” trades on the Chicago Board Options Exchange and other options markets.

***DA: A full remodeling from the top down.

Ackman Activism Deja Vu Evoked as Railroad Options Surge
Bullish options on railroad stocks including CSX Corp. have surged amid speculation that an activist investor is building a stake in one of the companies.
Contracts that pay off should CSX Corp. shares climb 10 percent within three months have reached the most expensive level on record compared with options that profit if the shares drop. Calls on Norfolk Southern Corp. climbed to the highest level compared with puts in seven years.

***DA: Reminiscent of Buffett’s purchase of BNSF a while back.

US Options Volumes Slump in First Quarter, Despite Higher Volatility
TABB Forum
US listed options volume had a slow first quarter in 2015. Total volumes came in at 993 million total contracts for the first quarter of 2015, which stands 9% below Q1 2014’s 1.09 billion contracts. This slowdown occurred despite generally higher levels of volatility, which typically should correlate positively with options volumes. VIX average daily closes for Q1 2015 climbed to 16.6, 12% above Q1 2014’s 14.8. Contributing factors to the rise in volatility include the Swiss National Bank’s decision to remove its currency cap in January, dramatic swings in the price of oil, and continued uncertainty over the Fed’s interest rate policy.

Not The Perfect Bullish Breakout, But – Weekly Market Outlook
Price Headley – CBOE Options Hub
The S&P 500 Index (SPX) (SPY) hit a new record high last week and the close of 2117.69 was the highest close we’ve ever seen from the index — and the NASDAQ Composite’s (COMP) (QQQ) close of 5092.08 was above the recent ceiling around 5044. The overall technical analysis picture is bullish for stocks. But, we can’t ignore the fact that there have been multiple bullish runs over the past 6 months that looked on the verge of a clear upside breakout only to reverse lower — and can’t dismiss the possibility that the market is again aiming to lure a bunch of investors in, only to lower the boom when it’s least expected.

***DA: If you can’t spot the dumb money in this market…

When CEOs bet against their company, the shareholder loses
Elliot Blair Smith – MarketWatch
The policy memo from Procter & Gamble’s legal department stated plainly that options trading by management in company shares “inherently involves betting or hedging on movements of the company’s stock, (and) could well appear questionable or unseemly in the eyes of shareholders.
The memo warned also that the American Stock Exchange, which listed the options, had a rule to specifically “prohibit participation by insiders of the company whose stock is involved in the option.”

***DA: When CEOs bet against their company, they would rather you not know about it until after the fact.

Currency Wars Defused by China as Yuan Rally Spreads Across Asia
Lilian Karunungan – Bloomberg
Foreign-exchange traders have started to take notice. The Bloomberg JPMorgan Asia Dollar Index has strengthened 2.3 percent from an almost five-year low on March 13, while the average cost of options to sell nine Asian currencies against the dollar dropped last week to the lowest since Dec. 3 versus bullish contracts.

***DA: The dollar rally is not dead, it is resting.

FPIs buy more index put options, expect market to fall further
The Economic Times
MUMBAI: Markets may have fallen in the last nine trading sessions through Monday, but for retail investors the time might not be ripe yet to bargain hunt, if bearish bets being modified by the big boys of the market – foreign portfolio investors (FPIs) – are any indication.

The Story With Oil
This week at the Milken Institute Global Conference the question on everyone’s mind was: Which way is oil going? Hedge funds seem convinced oil is headed above $80/barrel, and they’re placing big bets to back up their conviction. Exchange data show long exposure to Brent crude oil through futures and options is at an all-time high, worth 265 million barrels – enough for three days of global consumption.

***DA: Plenty of bankers who loaned money to big oil who hope the hedge funds are correct.

The Trader as Scapegoat
Rajiv Sethi – NY Times
A BRITISH trader, Navinder Singh Sarao, is facing extradition to the United States. Federal prosecutors accuse him of having significantly contributed to the “flash crash” of May 6, 2010, in which major American stock markets plunged dramatically in a matter of minutes. Prosecutors also say that he manipulated prices on the Chicago Mercantile Exchange for years by “spoofing,” or placing orders that he intended to cancel before they were filled.
In fact, this is a common activity in equities markets today. The prosecution of Mr. Sarao is arbitrary, and his contribution to the flash crash was negligible.


Nasdaq apologizes for posting Twitter earnings early
Caitlin Huston – MarketWatch
The Nasdaq Stock Market, Inc. NDAQ, -0.67% apologized Wednesday for “inadvertently” posting Twitter’s TWTR, -5.21% earnings release before it was meant to go out on Tuesday.

***DA: Twitter has no tolerance for such instantaneous dissemination of information.

CME loses bid to dismiss members’ case
Lynne Marek – Crain’s Chicago Business
In a court battle instigated by some of its long-time futures exchange members, CME Group lost an early round today when a judge refused to dismiss the case.
Cook County Circuit Court Judge Mary Mikva ruled against the futures exchange operator by rejecting its motion to compel arbitration. Allowing arbitration would have sidelined the case.

Regulation & Enforcement

SEC takes different harmony approach
While the CFTC remains embroiled in tense negotiations with European regulators regarding the reach of Dodd-Frank derivatives rules outside the US, the SEC has remained above the fray by taking a starkly different approach to derivatives rulemaking.
The agency has moved considerably slower – it issued its first substantive Dodd-Frank rulemaking in January of this year, compared with the CFTC passing its first rules in 2011.

***DA: Also known as the “barbershop quartet” approach.


Why one expert trader is betting against China now
Lawrence Lewitinn – CNBC
Chinese stocks have seen breathtaking returns over the past year. Since last April, the ETF tracking the FTSE China 25 (FXI) is up almost 50 percent. But Stacey Gilbert, head of derivative strategy at Susquehanna, says that high levels of leverage can be credited with the move, which means that Chinese stocks could soon run into trouble.

Sell In May And Go Away With Volatility – iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX)
Nathan Buehler – Seeking Alpha
Hello everyone! During my last article on the continued low volatility, some of you commented on the high volumes and options activity for May and June in the VIX market. This is a two part article, with both parts included together. The first part will focus on the above question. The second portion of the article will focus on investor education on two popular VIX ETFs and how to profit from any significant moves in the market.


Options Trading Resources: Understanding Option Order Flow
Bob Lang – CBOE Options Hub
In technical analysis there are only two primary things to watch, and that is price and volume. Price is king and must always be respected, but money flow can give us clues to future price direction. I look for where the big money is flowing, but unfortunately the information in stock volume can be a big noisy, deceptive. late or even absent. We have all heard of the ‘dark pools’, where stock is traded in big size and secrecy (well, sorta secret) by institutions. The public may not know about these moves for days or weeks, and that time lag could be the difference of winning/losing in a trade.

A Brief History of SPX and VIX Reactions to Advanced GDP
Russell Rhoads – CBOE Options Hub
This morning while conducting a webcast about VIX and extended hours trading I was asked a good question. This means I didn’t know the answer.
Tomorrow at 7:30 Chicago time the first iteration of the 2015 First Quarter GDP number will be reported. This will be the first time this number has been released since CBOE began offering extended hours trading for VIX and SPX index options. While talking about this I was asked, “What does VIX usually do in reaction to the Advanced GDP release?” My answer, “I don’t know, but I’ll find out”. The table below is me finding out.

Mythbusters: The Volatility Edition
Adam Warner – Schaeffer’s Investment Research
In my never-ending (futile) quest to improve the volatility education we get on the TeeVee, I bring you this from the other day:
“Typically, you get a lot of volatility in the market as earnings get reported.”
That sounds intuitive, right? But, it contains no real basis in fact.

***DA: Hype is not a proxy for volatility.

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