JLN Options: Ariad Volatility Most in Russell 1000 on Drug Scrutiny: Options; Investing Insights: Loving Volatility; Investors find ways to deal with rising risk in stocks and bonds

Feb 11, 2014

Observations and Insight

Give the People What They Want
Henry Schwartz – President, Trade Alert

When people ask what sparked the idea for our real-time option flow monitor, I have a simple answer- Ian.   Ian was the top producing derivative salesperson on Wall Street when I was a trader, and his clients were primarily ‘fast money’ hedge funds who demanded size markets and top notch service in exchange for their commission dollars.  In those days an upstairs trading floor could be as loud as an exchange floor at times- with salespeople yelling across the aisle at traders who were usually on two phones at the same time.  Ian used to scream for ‘market color’ to pass on to his clients, and every time he picked a stock in my book I’d cringe– partly because of his whiny voice, but mostly because I was a very neutral trader who didn’t put much thought into the story surrounding any given stock. I quickly realized this was going to be a problem.

My ‘basic training’ in options took place in the classrooms of Hull Trading Company in Chicago.  Like most true market-making firms at the time, Hull’s profit model was simple: capture bid-ask spread with minimal risk. Taking a directional view in a stock was absolutely off-limits and could get you fired, so we stuck with Black-Scholes, hedged every trade, and made a lot of money in the process.  The downside was that I never got very good at forming a view on a stock- and most of the time I simply didn’t care what was happening in terms of options flow because it did not impact my ability to lock in ‘edge.’

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Lead Stories

Ariad Volatility Most in Russell 1000 on Drug Scrutiny: Options
Nikolaj Gammeltoft and Callie Bost – Bloomberg
Takeover speculation, shareholder activism and regulatory scrutiny that erased about $2 billion from its share value are making options in Ariad Pharmaceuticals Inc. (ARIA) among the most expensive in America.
**Biotechs and high implieds go together like PB&J- Cardiome Pharma was over 1100% IV for a stretch last year and 5 of the top 10 highest IV today are drug names. -HS

Investing Insights: Loving Volatility
JJ Kinahan – Forbes
Anxiety eased last week despite another disappointing (or, let’s face it, confusing) January jobs report. Why? Equity markets in Europe and Asia stabilized and bulls haven’t given up hope for a return to upbeat business hiring as spring nears. For now, risk perceptions eased after threatening to unravel at least part of the stock market’s record run.

U.S. Stocks Rise as Yellen Speech Fuels Economic Optimism
Callie Bost and Jeff Sutherland – BloombergBusinessweek
U.S. stocks rose, giving benchmark indexes the longest winning streak of the year, as Federal Reserve Chairman Janet Yellen said the central bank will likely continue scaling back stimulus as the economy strengthens.

Investors find ways to deal with rising risk in stocks and bonds
Jeff Benjamin – InvestmentNews
Most people were reluctant to say it out loud until recently, but a growing universe of investors has begun to see that risk is real and rising across both the stock and bond markets. That recognition raises the question of what to do with portfolios.

VXST vs. VIX – Some Differences, Some Similarities
Russell Rhoads – CBOE
Next Thursday, just in time for Valentine’s Day and pending regulatory approval, the CBOE Futures Exchange will roll out trading on the CBOE Short-Term Volatility Index (VXST).  VXST has created a lot of buzz ever since introduction back in October at the CBOE Risk Management conference in Portugal and I know of many volatility traders that are pretty fired up for VXST trading next week.  For those that are still getting up to speed on VXST here are a five similarities and differences between the CBOE Short-Term Volatility Index and the CBOE Volatility Index.
** 20 Volatility-related products currently have options listed on them.  Only VIX, VXX, UVXY and SVXY trade over 1000 contracts per day, but it never hurts to try new things.  -HS

The Next Big Step for VXST
Russell Rhoads – CBOE
Back in October at the CBOE Risk Management Conference in Europe the CBOE Short-Term Volatility Index (VXST – 14.51) was introduced as a compliment to the widely followed CBOE Volatility Index (VIX – 15.29).  VXST uses the same calculation methodology as VIX, but uses shorter dated SPX options which results in a nine day volatility measure as opposed to thirty days for VIX.

Potential Warning Signs from VIX-Land
Adam Warner – Schaeffer’s Investment Research
The market sure looks better now than it did just a few days ago. But there are some warning signs in CBOE Volatility Index (VIX)-land, if you’re into contra-tells.

Indexology: Emerging Markets: Don’t Panic!
ETF Trends
Currencies and equities across various countries classified as “emerging” have come under increased scrutiny in the past few weeks, with more excitable commentators seeing signs of a crisis. Should broad-based index followers be worried? Perhaps not.

Glitch in Futures Market Triggers Global Panic
Louis Basenese – Wall Street Daily
The market’s “fear” index is flipping out.
Trading volumes in front-month VIX futures hit a record high last week, in terms of the number of contracts traded.
Anomaly? Hardly!

Videocast: Big shift in VIX trade

Launch of VIX futures timely, but weekly expiry a concern: Traders
Devangi Gandhi – The Financial Express
Although traders consider the much-awaited launch of futures contracts on volatility index (India VIX) on the National Spot Exchange (NSE) as a welcome move, they seem disappointed with the weekly expiry of the soon-to-be-launched product.


CME plans interest rate swap future aimed at European market
CME Group Inc, the largest U.S. futures exchange operator, said on Monday it will launch new interest rate swap futures contracts targeted at the European market.

ICE Results Give Glimpse at Company’s Global Blueprint
Matthew Leising and Nandini Sukumar – Bloomberg
Investors are getting their first chance to assess the implications of Jeff Sprecher’s global expansion plan after IntercontinentalExchange Group Inc. reported earnings that beat analyst expectations.

CBOE, C2, CBSX and CFE Trading Schedule For the Presidents’ Day Holiday
Press Release (CBOE)
CBOE Holdings, Inc. (NASDAQ: CBOE) announced the following trading schedule for Chicago Board Options Exchange (CBOE), C2 Options ExchangeSM (C2SM), CBOE Stock Exchange (CBSX) and CBOE Futures ExchangeSM (CFE) in observance of the Presidents’ Day holiday.

NASDAQ OMX U.S. Markets will be Closed on Monday, February 17, 2014
Press Release (NASDAQ)
All NASDAQ OMX U.S. markets will be closed on Monday, February 17, 2014, in observance of Presidents’ Day.
NASDAQ OMX will operate on a normal schedule for its European markets on February 17, 2014.

Regulation and Enforcement

SEC Majority Wants to Review Exchanges’ Special Status
Dave Michaels – Bloomberg
A majority of the five-member U.S. Securities and Exchange Commission wants the agency to review whether stock exchanges should continue to have regulatory roles that include overseeing members who may run competing venues.

CFTC Is Set to Ease Rules on Trading Swaps Overseas
Andrew Ackerman and Katy Burne – The Wall Street Journal
The Commodity Futures Trading Commission is preparing to ease restrictions on swaps trading overseas, according to people familiar with the matter, a move that could shift some trading abroad as banks and other firms look for ways to circumvent tough U.S. rules.

Wall Street Gets Three-Month Delay on Interest-Rate Swap Mandate
Silla Brush – BloombergBusinessweek
U.S. banks and other financial firms won a three-month delay for as much as half of the interest-rate swap market to meet a federal requirement to trade on platforms designed to increase competition and transparency.

High-speed traders mount defense as CFTC studies sector
Tom Polansek – Reuters
High-speed traders defended the merits of their business on Monday as the U.S. futures regulator kicked off a new round of scrutiny for the sector often blamed for market disruptions.
** In the words of Haim Bodek, the problem with HFT is not speed, its “special order types” created by the exchanges for HFT groups. -HS

U.S. regulator tells banks to improve derivatives data
Douwe Miedema – Reuters
The U.S. derivatives watchdog on Monday chided the industry for providing gappy data on the $630 trillion market, highlighting a rising concern for regulators around the world.


Where to Profit From Volatility
Theresa W. Carey – Barron’s
Options traders are a key market for most online brokers, primarily because they are much more active than investors who focus on a few stocks and some mutual funds. So it’s no surprise that analytical platforms for options traders have proliferated over time.

An overview of some of the ETFs designed to manage volatility
Aniket Ullal – Market Realist
A detailed evaluation of the ETFs designed to manage volatility is beyond the scope of this landscape report. We have provided a brief overview of some ETFs/ETPs that are designed for managing volatility (this should not be interpreted as investment advice).

Options Education

Tracking Contango In The VIX Futures Market Is Essential To Effectively Using The VIX ETFs
Robert Wagner – Seeking Alpha
I’ve recently written a couple of articles about the VIX Index and related ETFs. One of the key points I make in these articles is that there is a huge difference between the VIX Index and the VIX ETF. The tracking error is so poor that I make a warning at the beginning of the articles to ensure that readers understand that there are serious flaws in these VIX related ETFs.

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