Observations & Insight
OCC Lingo: SIFMU Stands For Clearinghouse Changes
The OCC was designated a systemically important financial market utility in 2012. That led to some big changes at the organization, along with challenges in risk management and credit and liquidity resources. John Lothian News spoke with John Fennell, executive vice president, financial risk management at the OCC, about what the organization is doing to insure that it meets these and other regulatory obligations.
Watch the video »
Big Traders Love Short-Term Options
Steven M. Sears – Barron’s
In a year in which trading volumes are broadly lower across the options market, they are actually increasing for options that expire in one week. These “weeklys” might be a rare bright spot for major derivatives exchanges, including CBOE Holdings, Intercontinental Exchange, and NASDAQ OMX, struggling in a weak trading market.
Weeklys have surged in popularity since CBOE created them in 2005. Weeklys are listed on Thursday and expire the following Friday. They are popular because they cost much less than options that expire in a month or more.
***DA: Part of the popularity is the ability to fine-tune one’s exposure risk from short-term events such as economic reports or earnings statements.
Love ’em or Hate ’em, China Stocks Are Red Hot in Options Market
Belinda Cao – Bloomberg
China’s world-beating stock rally is dividing traders in the U.S. options market.
Demand has exploded in the past month for contracts that protect investors against losses as well as for those that profit from more gains in the largest U.S. exchange-traded funds tracking Chinese companies. It reflects a divided market outlook after the rally in mainland equities spread to their dual-listed peers in Hong Kong, stoking a 21 percent surge in the Hang Seng China Enterprises Index in the last 30 days.
***DA: Like all bubbles, they are universally loved until the switch is flipped. Then the hating begins.
Investors seek protection against healthcare stock decline
Saqib Iqbal Ahmed and Sinead Carew – Reuters
Healthcare companies on a seven-year tear have been top performers so far in 2015, helping to push broad stock indexes to record levels, but traders are now looking to protect themselves from a selloff as they await major earnings reports in the sector.
Companies reporting first-quarter earnings next week include Bristol-Meyers Squibb Co, Boston Scientific Corp, Merck & Co, Pfizer Inc, Gilead Sciences Inc and Celgene Corp.
***DA: What’s going on here? The article didn’t mention the Affordable Care Act even once in its story of downside protection in big pharma.
India’s VIX Halts Record Rising Streak as Stocks Extend Declines
Santanu Chakraborty – Bloomberg
India’s benchmark gauge of option prices halted a record stretch of gains as stocks fell for a third straight day amid concern over the pace of earnings growth.
The VIX Index fell 1.9 percent to 18.74 at the close in Mumbai, its first drop in 10 days, after climbing as much as 5.1 percent earlier. The CNX Nifty index lost 1.1 percent to 8,213.8, its lowest since Jan. 7. The S&P BSE Sensex dropped 1 percent for a third day of declines. The number of outstanding put options in Maruti Suzuki India Ltd. jumped after quarterly profit at the nation’s largest carmaker beat analyst estimates.
Apple Volatility Bets Surge in Options Market as Buyback Beckons
Apple Inc.’s new habit of disclosing billions of dollars of stock buybacks along with its April earnings report is contributing to a flurry of options speculation.
Prices for contracts tied to Apple’s shares are the highest in a year and a half relative to the Nasdaq 100 Index before the company releases results on Monday. While the approach of earnings is enough to get speculation brewing in the stock, anticipation is also building after the iPhone maker boosted repurchases in 2013 and 2014. Apple climbed 1.7 percent at 9:41 a.m. in New York.
VIX-Giving in April
Adam Warner – Schaeffer’s Investment Research
It’s VIX-Giving in April! Yes, the last time CBOE Volatility Index (VIX) closed this low was way back on Nov. 26, 2014, the day before Thanksgiving. And that VIX reading requires a bit of an asterisk, as we had more mundane things like “turkey” and “paying five days’ worth of options decay” on our minds. So before that, we need to go all the way back to Sept. 19 to see VIX this low.
***DA: I spent many days on the wrong end of a holiday-induced accelerated decay. I still get nightmares.
Not Much Spring in Traders’ Steps
John Carney – WSJ
Wall Street’s trading tide can go out as quickly as it comes in.
A surge in trading revenue that boosted big-bank earnings in the first quarter appears to be subsiding. While it is early days yet, this could weigh on second-quarter results.
***DA: News flash – trading volumes are cyclical.
Russell 2000 Weekly Recap – 4/20 – 4/24
Russell Rhoads – CBOE Options Hub
Small cap stocks were lower on Friday and the Russell 2000 didn’t get much love as the Nasdaq-100 and S&P 500 put up all-time highs last week. Despite RUT lagging a little there were a couple of Friday trades that at minimum expect the Russell 2000 to stay around current levels over the next few weeks or months.
***DA: Another news flash – sectors can be cyclical as well.
Flash crash trader’s CME seat: bought for $435,000, now worth just $69,500
Ann Saphir and Tom Polansek – Reuters
The UK-based trader accused by U.S. authorities of making more than $40 million manipulating markets and contributing to the 2010 Wall Street flash crash was on the losing end of at least one trade: his purchase of the CME Group seat that helped to make the alleged scheme possible.
Navinder Sarao bought the seat in May 2008 for $435,000, only a few months before the financial crisis hit, exchange records show; it’s now valued at just $69,500, an 84 percent decline. He still owns it, an exchange spokeswoman confirmed.
***DA: The fall in the value of non-member trading rights has been well known for a while. Kudos to Reuters for finding a way to make it a current events story.
Regulation & Enforcement
‘Flash crash’ whistleblower may see multi-million dollar pay day
An anonymous tipster who claims to have led the U.S. government to bring charges against alleged “flash crash” trader Navinder Singh Sarao could potentially reap millions of dollars under a federal whistleblower award programme.
The U.S. Commodity Futures Trading Commission’s (CFTC) whistleblower programme, created after the 2010 Dodd-Frank Wall Street regulatory reform, awards tipsters between 10 percent and 30 percent of the total sanctions collected if the government collects $1 million or more.
U.S. regulator says ‘flash crash’ manipulation hard to detect
Herbert Lash – Reuters
The type of alleged market manipulation by the British trader accused of helping provoke the “flash crash” in 2010 is hard to detect, the chief of the Financial Industry Regulatory Authority said on Friday.
Simple strategy earns massive profits on earnings
Alex Rosenberg – CNBC
It’s been a great earnings season for options traders.
A few weeks ago, Goldman Sachs’ options research team looked at the historical returns that would have been yielded by a strategy of buying at-the-money call options on stocks five days before their earnings, and selling them the day after.
Options Aren’t Dangerous, People Are: Debunking 4 Myths
According to the infomercials on Saturday morning television, there’s even a secret formula that Wall Street doesn’t want you to know about.
Of course, that’s not exactly true. But neither are some of the most common misconceptions about trading options. I’ll save you the hassle and the $19.99 (plus shipping and handling) and expose four of the biggest myths surrounding options.