Observations and Insight

As Grain Prices Cool Down, Options Volume Heats Up
Doug Ashburn – John Lothian News

When the USDA released its quarterly grain stocks numbers on June 30, corn and soybean markets took a nasty tumble that lasted several days and sent prices to their lowest levels since 2010. When the USDA released its world supply and demand report two weeks later, grain markets eroded further as acreage and yield predictions, combined with current carryover stocks, are pointing to a possible storage glut next year – a phenomenon not seen in the U.S. for a number of years.

As corn and soybean prices retreat from the lofty levels of the past few years – corn down over 50 percent from the 2012 drought and soybeans about 45 percent off the highs, one metric has ticked up considerably – options trading. Volume and open interest on CME Group’s flagship agricultural contracts – corn, wheat and the soy complex (soybeans, meal and oil), are up double digits versus last year. Average daily volume in options on soy products are up over 70 percent year-on-year.

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Lead Stories

Options Show Rising Concern Over High-Yield Bond ETFs
Chris Dieterich – WSJ
The options market is flashing concern about high-yield bond exchange-traded funds.
Demand for protective “put” options in the market’s largest high-yield bond ETF versus bullish options this month crept up to its highest level since May 2013’s  “taper tantrum,” when hints from the Federal Reserve on changes to its bond-buying program sent high-yield bonds, and other rate-sensitive assets, reeling.

Cantor Fitzgerald Says Sell Stocks as S&P 500 Nears 2,000
Joseph Ciolli – Bloomberg
The 36,000 percent rally in a stock with no revenue is a sign there’s too much optimism in the equities market, according to Cantor Fitzgerald LP’s chief market strategist.
The risk of owning stocks currently outweighs the potential reward, Cantor Fitzgerald’s Peter Cecchini wrote in a report today. He suggested reducing equity holdings and raising cash, citing the recent rally in Cynk Technology Corp. as a symptom of a frothy market.

UBS issues market squall warning
Jamie Chisholm – Financial Times
Prepare for a storm when insurance is cheap, says UBS.
The Swiss bank’s equity derivative strategy team notes that since 2008 there have been three to four occasions a year when the S&P 500 fell more than 5 per cent, or when the CBOE Vix index, the volatility gauge, jumped more than 50 per cent, within a month.

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Why the S&P rally is nothing to get freaked out about, in one graph – The Tell

Barbara Kollmeyer – MarketWatch
The S&P 500  SPX +0.05% marked its 26th closing high this year on Wednesday. Emerging markets are at 17-month highs.
Feel better? No? You’re not alone.

Options Suggest Amazon’s Results Won’t Cause Big Drop (This Time)
Saumya Vaishampayan – WSJ
The last two times Amazon.com Inc AMZN +0.47%. reported earnings, the stock posted big losses the next day. This time around, options traders are expecting a more muted response.
With the online retailer reporting earnings after the close of trading Thursday, options pricing implies that Amazon could move about 6% in either direction through the end of the week, based on the prices of options that expire on Friday, according to Trade Alert data.

Facebook Shares to $100? Options Traders Weigh the Odds
Steven Russolillo – WSJ
With Facebook Inc. trading at new highs and a $200 billion market cap in sight, the next key number to watch: a triple-digit stock price.
The social network’s stock, already up more than 180% over the past 12 months, rose as much as 7.6% Thursday as it set a new high of $76.64 following the company’s strong quarterly results. A big push into mobile advertising has driven the company’s results and left Wall Street stunned by Facebook’s recent success.

Lululemon Traders Say Namaste to Takeover Speculation: Options
Jacob Barach and Callie Bost – BloombergBusinessweek
Speculation that Lululemon Athletica Inc. (LULU:US)’s founder wants to sell the yoga-gear retailer has options traders stretching toward calls to buy the shares.
Bullish one-month wagers on Lululemon cost the most on record relative to bearish bets, according to data compiled by Bloomberg. Traders own about the most calls relative to puts on the stock in six months, the data show, with one of the most-held contracts betting on a 20 percent jump by tomorrow.

Thank a High-Frequency Trader for That Dip in Volatility
Michael Driscoll – WSJ
New data out from Credit Suisse CSGN.VX +0.62% points to some of the salutary effects of high-frequency trading. Researchers at the Swiss bank’s New York offices posit that HFT activity has helped inoculate large-caps from the effects of macroeconomic market stresses.
Their analysis, in a note released Wednesday, shows price volatility is much more subdued in the stocks of companies with large market capitalizations—whose deeper liquidity HFT generally prefers—than it is in their small-cap peers.

Dow 17,000 is more than just another ‘big round number’
Jeff Macke – Yahoo Finance
The S&P 500 (^GSPC) hit yet another record on Wednesday propelled by decent earnings from Apple (AAPL) and Pepsi (PEP). For the year the total return of the S&P is approaching 10%. Since the generational lows of March 2009 the benchmark measure of the stock market has gained more than 200%.
If your first reaction to that reminder is to pitch a fit over what stocks “should” be doing you’re missing the point, and probably the rally as well. “Should” isn’t a concept that carries much weight around Wall Street. The market is about absolutes not intent.

Traders are walking zombies on Wall Street
Howard Gold – MarketWatch
The signs are everywhere on Wall Street. Trading floors that once buzzed with noise and energy are now as silent as cathedrals . Big firms that reaped huge profits from trading stocks, bonds, commodities and currencies are turning to staid money management to boost earnings.
What once was the main event is now just a sideshow. There are many fewer traders now, and they’re making much less money. And there are going to be even fewer very, very soon.
With one big exception I’ll discuss later, trading is dying.

Virtu to take on banks as swap market-maker
Duncan Wood – Risk.net
High-frequency-trading firm Virtu Financial has been executing test interest rate swap trades on a broker-run central limit order book (Clob) – one of only two non-banks known to have done so. The company, best known as an equities trader, is preparing to take on incumbent dealers by launching an over-the-counter derivatives market-making business, says president and chief operating officer, Chris Concannon.

Don’t Tell Anybody About This Story on HFT Power Jump Trading
Far from Wall Street in a Chicago neighborhood once synonymous with urban blight, two futures industry veterans are using secrecy and speed to mint fortunes.
Their firm, Jump Trading LLC, was all but invisible until it was among six companies subpoenaed in April by New York prosecutors. Jump has ascended the ranks of high-frequency traders during the past 15 years to become one of the top firms on the Chicago Mercantile Exchange, where $925 trillion of derivatives changed hands last year. Its annual revenue has exceeded half a billion dollars.

JP Morgan refocuses clearing unit on Europe
Tim Cave – Financial News
Nick Forgan, JP Morgan’s co-head of global clearing, relocated from Singapore to London this month, according to an internal memo seen by Financial News. Fellow co-head Dave Olsen is based in the US.
Forgan will keep the same title but will also assume daily oversight of the bank’s futures and options business in Europe, the Middle East and Africa, the memo said. As part of the changes, David Martin, formerly global head of F&O Clearing in London, has switched to Singapore to run derivative clearing in Asia.

Regulation and Enforcement

The Dodd-Frank Regulatory Marathon
Larry Thompson – TABB Forum
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law four years ago and since then, the regulatory implementation of these reforms has turned into a marathon. While Congress may have sprinted to enact Dodd-Frank, over the past 1,460-plus days since the legislation became law, regulators have altered their pace and focused on simply crossing the finish line.

Swaps Lobbyist’s New CEO to Limit Role in CFTC Lawsuit
Matthew Leising and Sam Mamudi – Bloomberg
The swaps industry lobbying group said Scott O’Malia, the U.S. regulator it hired to be chief executive officer, will limit his role in a lawsuit against the Commodity Futures Trading Commission he is leaving.
O’Malia, the longest-serving member of the CFTC, said this week he plans to leave the commission Aug. 8. He’ll join the International Swaps and Derivatives Association as CEO 10 days later, according to an ISDA statement today. ISDA is among three Wall Street lobbying groups that sued the CFTC in December, seeking to curb the overseas reach of its rules and rein in a regulatory barrage by former Chairman Gary Gensler.

‘Bring It On,’ Frank Tells Dodd-Frank Critics at Hearing
Cheyenne Hopkins – Bloomberg
It was 2010 all over again in the U.S. House Financial Services Committee.
Barney Frank, the panel’s former chairman, returned to Washington yesterday to sit before the committee and provide a feisty defense of that year’s regulatory overhaul, the Dodd-Frank Act that bears his name. The hearing split along partisan lines in support of and opposition to the wide-ranging law passed in response to the 2008 financial crisis.


The ‘Tycoon Trade’: Big Money for Pricey Stocks
Steven M. Sears – Barron’s
Big stocks have big options premiums. It’s a basic fact that many investors overlook because of the sticker shock associated with the stock prices.
But deep-pocketed investors can take advantage of this dynamic. Recent earnings reports from Chipotle Mexican Grill (ticker: CMG ) and Netflix ( NFLX ) are a reminder of this market dynamic.

Hedge CBOE Earnings Report With Puts, Says Goldman
Steven M. Sears – Barron’s
Exchange stocks long ago ceased to be controversial, but CBOE Holdings (ticker: CBOE ) is the exception to the rule ahead of next week’s earnings report.
Goldman Sachs is advising clients to buy put options on shares of the exchange, which created and exclusively lists options and futures on the CBOE Volatility Index (VIX). The bank thinks CBOE’s stock will decline on Aug. 1 earnings due to soft trading volumes.

Options Education

The Two Faces of Volatility
Randall Liss – The Liss Report
There are two types of volatility, historical and implied. Historical is just that, where has the stock been over a given period of time? It is measured mathematically as the annualized standard deviation of that stock’s daily price changes.
Even if a $100 stock winds up at exactly $100 one year from now, it still could have had a great deal of historical volatility. After all, it’s certainly conceivable that the stock could have traded as high as $175 or as low as $25 at some point. And if there were wide daily price ranges throughout the year, it would indeed be considered a historically volatile stock.

CBOE Options Institute Visits Shanghai Exchanges
Jim Bittman – CBOE Options Hub
In preparation for the commencement of options trading in China, the Shanghai Stock Exchange and the Shanghai Futures Exchange have been sending various groups of exchange staff, brokers and market makers to The Options Institute at CBOE for basic- to intermediate-level education on options strategies and options pricing. In the last 18 months, 10 classes with over 500 total students have been given at CBOE in Chicago.



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