Observations & Insight

CBOE RMC, Feb. 29-Mar 2, 2016, Bonita Springs, FL
Now in its 32st year in the U.S., the annual CBOE Risk Management Conference (RMC) is the premiere financial industry conference designed for institutional users of equity derivatives and volatility products. Hosted by the Chicago Board Options Exchange (CBOE), RMC is an educational forum dedicated to exploring the latest products, trading strategies and tactics used to manage risk exposure and enhance yields. RMC brings together top traders, strategists and researchers, enabling participants to learn the state-of-the-art in investment risk management from true experts in the field. Learn more HERE and register for the event HERE

Lead Stories

Asia overtakes US as world’s top futures hub
Julie Aelbrecht – Futures & Options World
Asia overtook North America as the world’s top futures and options market by volume last year as Asian exchanges saw their volumes surpass the levels traded in the US and Canada for the first time. Asian exchanges’ trading volumes rose 20% in 2015 to reach a regional total of 7 billion contracts while their US and Canadian peers saw trading fall 6% to 6.9 billion lots last year, according to Euromoney TradeData. The top Asian exchanges were China’s Dalian Commodity Exchange, which was up 31% to 1.1 billion contracts, the Zhengzou Commodity Exchange, where volumes went up 26.5% to a little over 920 million contracts, and the Korea Exchange, which saw a 16.8% increase to 783 million trades, Euromoney TradeData showed.

When Systematic Trading Comes to Credit Markets
Tracy Alloway – Bloomberg
A profound trend in credit markets has been borne out by the results of Citigroup Inc.’s latest survey of credit derivatives, with investors expressing continually growing interest in derivatives tied to corporate bonds.
While an overwhelming 94.5 percent of respondents to the survey said they expect corporate defaults to increase over the next year, the majority cited liquidity in the overall bond market as their top concern.

The Return of the Currency Crash
Carmen Reinhart – Project Syndicate
Currency-market volatility has been around for decades, if not centuries. Wide gyrations in exchange rates became a staple of international financial markets after the Bretton Woods system broke down in the early 1970s, and mega-depreciations were commonplace later in the decade and through much of the 1980s, when inflation raged across much of the world. Even through much of the 1990s and early 2000s, 10-20% of countries worldwide experienced a large currency depreciation or crash in any given year.

KCG Holdings Swings to Q4 Loss As Revenue Falls Short of Forecasts (NYSE:KCG)
Jason Feld – WallStreet.org
KCG Holdings (NYSE:KCG), an independent securities firm, posted an unexpected Q4 loss as revenue missed the mark. The company had a loss of $4.6 million, or $0.05 per diluted share, for the fourth quarter of 2015, compared with a profit of $26.1 million or, $0.23 a share a year earlier. Analysts were looking for a profit of $0.10 if comparable, according to Capital IQ. Revenue fell to $262.6 million from $346.1 million, missing forecasts for $285.6 million. The shares closed at $10.40 on Thursday in a 52-week range of $9.75 to $13.75.

****SD: And if you recall, KCG recently said it plans to exit from retail options market making

Fed funds futures pricing no rate hikes in 2016: CME data
This could end up being a pretty boring year for the Fed.
Amid the continued flow of mediocre economic data, traders have taken a 2016 interest rate hike off the table, anticipating that the earliest the U.S. central bank might move would be February 2017.

FortuneJack Launches Bitcoin Poker Platform With Rakeback, Freerolls and More
Press Release
FortuneJack Casino recently launched their Bitcoin Poker platform offering freerolls, up to 40% rakeback and more. Players can also purchase Bitcoin directly from the website or use the casino’s own cryptocurrency exchange.

****SD: This may seem like an odd inclusion, and it is, but apparently the FortuneJack Bitcoin Casino, besides offering blackjack, poker, slots and dice games, is also a binary options trading platform. The relationship between binary options and gambling appears a trend worth watching if only for its regulatory complications. The company is based in Tbilisi, Georgia.


Euronext announces departure of Luis Laginha
Euronext today announced that Luis Laginha, Chairman and CEO of Euronext Lisbon and Interbolsa and member of the Managing Board1 of Euronext NV, has resigned and will step down from his role as CEO. This departure was agreed mutually based on Luis Laginha’s desire to pursue other professional interests. He will continue to fulfil his responsibilities until the shareholders’ meetings of both entities have taken place on 22 February 2016.

Nasdaq’s Lee Shavel Joins ITG’s Board of Directors
Finance Magnates
ITG (NYSE:ITG), an independent execution broker and research provider, has secured the services of veteran, Lee Shavel, who joins the group’s Board of Directors with immediate effect.
The move follows on the heels of yesterday’s announcement that Mr. Shavel was parting ways with Nasdaq as its Chief Financial Officer (CFO) and Executive Vice President of Corporate Strategy since 2011. Despite the appointment at ITG however, he will remain in his role at Nasdaq, albeit in a transitional capacity until March 31, 2016.

Goldman: ICE Shares May Soar Thanks to Volatility
Steven M. Sears – Barron’s
The Intercontinental Exchange is to the capital markets what Amazon.com is to e-commerce.
The exchange company (ticker: ICE ) offers trading in just about every asset that trades anywhere in the world. ICE operates 11 exchanges, including the New York Stock Exchange, and offers trading in more than 12,000 securities across nine asset classes. ICE runs commodities exchanges, dominating trading in oil, and also owns seven clearing firms that essentially focus as brokerage firms to brokerage firms.

Euronext Expands Commodity Derivatives
Euronext is launching sugar futures this autumn, before quotas are abolished in the European market, as the exchange continues to grow its commodity derivatives franchise.

Regulation & Enforcement

Justices Take On a Muddled Issue: Insider Trading
James B. Stewart – NY Times
In the 30 years since I chronicled the 1980s insider trading scandals in the book “Den of Thieves,” I’ve never seen the insider trading law in a greater state of confusion.
A little over a year ago, a controversial ruling by United States Court of Appeals for the Second Circuit cleared two hedge fund managers who had traded on advance tips about company earnings. The ruling has thrown many insider trading prosecutions into disarray, and dealt a serious blow to the crackdown on insider trading by Preet Bharara, the United States attorney in Manhattan. Judges have dismissed insider trading charges against six people and vacated a dozen convictions from his office alone. Other investigations have languished or been closed. The few remaining cases are on appeal or under a cloud.

Nasdaq’s Greifeld Says Fix Trading Rules Before Approving IEX
Annie Massa and John Detrixhe – Bloomberg
Robert Greifeld, chief executive officer of Nasdaq Inc., said the rules governing the U.S. stock market need to be changed before dark pool operator IEX Group Inc. can convert into a full-fledged exchange.
IEX’s proposal to operate a stock exchange with a fraction-of-a-second delay on orders has stoked a heated debate, with electronic trading firms, exchanges, banks and individual investors all weighing in to regulators.


Donald Trump will be pleased to learn that Money.Net wants to put Bloomberg Terminals out of business
Michael del Castillo – New York Business Journal
Morgan Downey says his former employer, Bloomberg L.P., and its competitor, Thomson Reuters will be out of business within four years, and he’s already well on his way to making it happen. To accomplish what may seem like a Herculean task, Downey and his team at Money.Net have built a powerful tool: a cheaper mobile alternative to the established players’ business information terminals, considered indispensable to hundreds of thousands of bankers, brokers, and business reporters, and the cornerstone of a multi-billion-dollar industry.

Innovation: Unlocking value through fintech
Steve Grob – Futures & Options World
Barely a day goes by without a financial technology start-up claiming it is going to do to capital markets what Uber and Airbnb have done to the transport and accommodation industries. The journey towards true innovation in capital markets, however, looks much harder because of the entrenched technologies, processes and regulatory obligations that comprise global financial markets.


This Options Strategy Cushions Blow of Freefalling S&P 500
Cecile Vannucci – Bloomberg
Here’s a way traders are cushioning losses in the stock market: selling bullish options that are unlikely to get exercised.
According to a gauge that tracks the strategy, known as buy-write, it’s working. The CBOE S&P 500 2% OTM BuyWrite Index, which mimics the hypothetical performance of the Standard & Poor’s 500 Index while selling calls, is at its highest levels since October 2014 relative to the benchmark. It’s outperformed the S&P 500 every year that U.S. stocks fell, according to data going back to 1988.

What’s the Best Way to Sell Premium?
Adam Warner – Schaeffer’s Research
Matt Moran of the Chicago Board Options Exchange (CBOE) highlights an interesting recent study on their weekly and monthly PutWrite indexes:
“Written by Oleg Bondarenko, professor of finance at the University of Illinois at Chicago, and sponsored by CBOE, the study — ‘An Analysis of Index Option Writing with Monthly and Weekly Rollover’ — analyzes the performance of the two PutWrite Indexes through the end of 2015.”
Just to review, the CBOE S&P 500 PutWrite Index (PUT) measures the return of a fixed strategy of selling one-month at-the-money (ATM) puts on the S&P 500 Index (SPX) and then rolling each month. The CBOE S&P 500 One-Week PutWrite Index (WPUT) does the same, but for weekly options. The quantity of puts “sold” varies, but is set up such that there’s enough theoretical cash on hand to cover max losses.

Options strategies for a roller-coaster market
Derivatives expert Mike Khouw joined CNBC Pro on Friday to discuss why every investor should use options.
During his talk with CNBC’s Mike Santoli, Khouw, a 20-year Wall Street veteran and co-author of “The Options Edge,” explained how options can be used in a volatile environment like today to generate steady income, if they are used properly.
By using real-life examples, he walks investors through these strategies.
Santoli also challenges Khouw on the very real risks investors face when they decide to start trading options.

The market is still very fearful about energy stocks
The recent run in crude oil may not be enough to energize investors about the stocks it impacts most. As the price of oil has risen 14 percent in one week, the S&P 500 energy sector has rallied 6 percent in the same time. However, the options market suggests that investors remain nervous about energy stocks, considerably more so than any other group in this year’s broad market selloff.
“Everybody is an oil expert right now — people have reasons for why it’s going up, people have reasons for why it’s going down. But where they really express it is by buying options on the [energy sector ETF] XLE and on crude oil,” Dennis Davitt of Harvest Volatility Advisors said Thursday on CNBC’s “Power Lunch.”

Invest like a legend: Satyajit Das
The Globe and Mail
A leading authority on the complex, opaque world of financial derivatives, the Sydney-based risk consultant sounded the alarm about the dangers they posed to the global system years before the Great Meltdown. In his latest book, The Age of Stagnation, he pours cold water on any bulls still roaming the volatile markets.


Volatile earnings season for tech sector point to big shifts
Richard Waters and Leslie Hook – Financial Times
It is not every week that two vast technology companies such as Facebook and Microsoft see a combined $53bn added to their stock market valuation — particularly when it coincides with a slide that wipes $73bn off the joint valuation of two others, Apple and Amazon.
Yet that is what happened this week, as Wall Street tried to digest an unusually volatile earnings season in the technology sector.

Don’t be fooled by the rally. Volatility could be here to stay
Stocks may have managed to eke out small gains in the last trading sessions of the month, but that hasn’t saved the market from what’s been one of the most volatile starts to a year ever.
The S&P 500 is down more than 6 percent in 2016, making it one of the worst Januarys ever for the large-cap index. This occurred as wild swings in crude oil and uncertainty over the global economy have weighed heavily on the equity market. The move has pushed the CBOE Volatility Index, or VIX, above 20 for most of the year. As we head into a new trading month, some traders are betting the heightened volatility could be here to stay.

Volatility Jumping Up as 2016 Takes Off
The Ticker Tape
The S&P 500 (SPX) fell to its lowest levels in more than a year in the middle of last week before a recovery salvaged the first weekly winner so far in 2016 for this broad stock average.

Earnings Next Week – 2/1 – 2/5
CBOE Options Hub
Earnings season peaked this past week, but there are plenty of companies left to report. The numbers below represent three years of history with a couple of exceptions which have not been around long enough to provide a full three years of history. In those cases the data appears in italics. After the ticker the columns show the biggest gain, biggest drop, average move (non-directional) and stock price reaction last quarter.

Block Trade Analysis – Two VIX Trades from Today
CBOE Options Hub
We had two big trades come through the VIX pit today and about the only thing they have in common is that they both used March VIX options.
First, there was an out of the money bull call spread. With spot VIX around 22.60 there was a buyer of 80,000 VIX Mar 27 Calls at 1.95 who then sold 80,000 VIX Mar 35 Calls at 0.91 for a net cost of 1.04. A spike to just over 28.00 gets this trade to the point of profitability. This requires a closing high for 2016 in VIX since that current number for 2016 is 27.59. If the trader is nimble, they may find a good exit opportunity if the intraday high for VIX in 2016 (32.09) is tested between now and March settlement. Needless to say for this trade to pay off the equity market will need to take a dive from current levels and do it in a dramatic fashion.

Euro Option Traders Bullish for Longest Stretch Since ’09: Chart
For the past 12 days, traders have paid more for options to buy the single currency versus the dollar than to sell it, the longest run since 2009, one-month volatility gauges show. The bulls anticipate flows back into the euro as Chinese and U.S. stock markets wrap up their worst month since at least 2010. The selloff may force investors who borrowed the European currency at historically low interest rates and sold it for foreign stocks to reverse their trades.

The market is still very fearful about energy stocks
The recent run in crude oil may not be enough to energize investors about the stocks it impacts most. As the price of oil has risen 14 percent in one week, the S&P 500 energy sector has rallied 6 percent in the same time. However, the options market suggests that investors remain nervous about energy stocks, considerably more so than any other group in this year’s broad market selloff.
“Everybody is an oil expert right now — people have reasons for why it’s going up, people have reasons for why it’s going down. But where they really express it is by buying options on the [energy sector ETF] XLE and on crude oil,” Dennis Davitt of Harvest Volatility Advisors said Thursday on CNBC’s “Power Lunch.”

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