JLN Options: Bullish Brazil ETF Options Plunge to Pennies After Vote; Record Bets Against Japan Stocks Tell Investors Time to Buy; The Return of Volatility Is Mainly About Monetary Policy

Oct 27, 2014

Lead Stories

Bullish Brazil ETF Options Plunge to Pennies After Vote
Julia Leite and Oliver Renick – Bloomberg
Options traders who had made record wagers on a Brazilian stock rally were handed the biggest losses in the U.S. derivatives market today as President Dilma Rousseff’s re-election dashed optimism that policies would be changed to bolster growth.
Calls to buy the iShares MSCI Brazil Capped ETF for between $44 and $50.50 over the next month fell the most among all contracts traded on U.S. exchanges, plunging more than 97 percent to as little as 1 cent. Bullish contracts giving the right to buy the exchange-traded fund accounted for the 12 biggest retreats among U.S. options. The ETF plunged 4.5 percent to $39.70 at 1:31 p.m. in New York.
***DA: No regime change, no policy change, no dice. The Ibovespa was down 3 percent.

Record Bets Against Japan Stocks Tell Investors Time to Buy
Adam Haigh and Yuko Takeo – Bloomberg
As bets pile up against Japanese stocks, investors with $293 billion in client assets see the pessimism as a signal to buy. History is on their side.
Short-selling on Tokyo’s bourse jumped to the highest on record this month, as the Topix index tumbled 7.7 percent from a six-year high in September. Shares have rallied an average 9.7 percent over the three months following surges in bearish bets since 2009, according to data compiled by Bloomberg.
***DA: History is on whose side, exactly? When I look at the 25 year Topix chart all I see is a nation that has continually tried to shake off a deflationary spiral to no avail.

The Return of Volatility Is Mainly About Monetary Policy
Niall Ferguson – WSJ
Four weeks ago I was in London at a conference organized by one of the biggest U.S. banks. The program included a session with the dread title, “2014, The Death of Volatility?” As it followed a rash of similar presentations and articles this year—“The Strange Death of Volatility,” “The Day Volatility Died” and the like—I knew from experience that a spike in volatility was imminent. And sure enough, since the end of last month, financial markets around the world have gone from gliding up an escalator to riding a bucking bronco.
***DA: The “death of volatility” story is officially dead.

Volatility Update: Trick or Treat From Fed, Earnings?
JJ Kinahan – Forbes
After the mid-month volatility spike, stocks moved broadly higher last week. No, your eyes did not deceive you. An up-week for the first time in a month. Even the laggard, small cap-loaded Russell 2000 (RUT) logged a weekly gain of over 3%. Now a heavy dose of economic and earnings news, as well as a mid-week Federal Reserve meeting, loom for this final week of a true-to-form volatile October.  
***DA: With Fed policy, another trick would be a treat.

Options Market Betting on Big Moves After Twitter’s Earnings
Saumya Vaishampayan, The Wall Street Journal
Options traders are gearing up for another big move from Twitter Inc.TWTR -2.78% after the company reports third-quarter earnings on Monday.
The options market is pricing in a move of 13.1% in either direction through the end of the week, based on the price of options that expire Friday, according to Trade Alert data.
Mark Sebastian, founder of Option Pit, says he expects shares to move about $5 after earnings on Monday. At the current price, that’s a roughly 10% move.
***DA: Well, the numbers seemed pretty much in line with estimates, but the whisper numbers must have been higher because Twitter shares have fallen over 10 percent after the bell. Here are the highlights from Business Insider:  http://jlne.ws/ZV68xa

Investors consider options for more volatile times
Emma Cusworth – Financial News
Buyside traders and investors may believe that the global economic recovery is under way, but they have taken some risk off the table, according to the Financial News Volatility and Trading Survey.
The survey found that 71% of all respondents believe there is investor complacency in the equities markets, while 56% believe there is complacency in the fixed income markets.

VIX Last Week
Russell Rhoads – VIX Views
Like many people that make their living focusing on the financial markets I subscribe to @zerohedge on my twitter stream. Some of what comes from this is comical and over the top, but there are some very useful comments as well. Giving credit where credit is due @zerohedge pointed out that VIX was down 12% on Friday October 17, down 15.6% on Monday October 20, and down 13.4% on Tuesday October 21. This marks the only time in history that VIX lost 10% or more in three consecutive trading days.

What We Can Learn from Recent Volatility
Adam Warner – Schaeffer’s Investment Research
In the last few weeks, we’ve seen the CBOE Volatility Index (VIX) pretty much double, and then halve. We’ve seen the markets implode (well, not really implode, but drop a bit) and then retrace to where we’re only a few percentage points away from new highs.
There was a great trade riding the long side of volatility ETFs — and then an even quicker great trade the other way. So, what’s next? Well, I can’t really tell you the direction. If I could tell anyone, I’d keep it to myself. Odds always favor the long-term trend persisting. Everyone loves to call major turns, but it’s generally not the best strategy for actual investing.

Positive Momentum, Overhead Resistance & Valuations – Weekly Market Outlook
Price Headley – CBOE Options Hub
Last week was the first winning week in the past five, and the bulls more than made up for lost time.  When all was said and done, the S&P 500 (SPX) (SPY) advanced 4.1% last week, putting it back at its pre-meltdown level.  It remains to be seen if stocks are here to stay, and ready to remain in an uptrend – in the short run, they’re very overbought.  But, the pivot from two weeks ago was a decisive one, and there’s still room to run higher.  It’s just a matter of timeframes as to whether or not you’d want to jump in this week.
We’ll weigh the risks and odds in a moment.  First we need to dissect last week’s economic numbers.

Options Average Daily Volume This Month – 1.3 Million for SPX and 1 Million for VIX
Matt Moran – CBOE Options Hub
I recently showed a chart with the yearly growth in volume in options on the CBOE Volatility Index (VIX) to a senior executive at a financial services firm, and the executive said that the VIX options volume strong growth in recent years was hard for him to believe, in light of the fact that the VIX Index had been relatively low in recent years. I responded that the VIX options had experienced some high volume days even at times when the VIX was relatively low and not making any big moves, because some investors like to buy VIX calls and VIX futures at times when the VIX is lower than 13; they like to “buy low” and believe the VIX Index is mean-reverting; they believe the index has great potential to go up dramatically but little potential to take a dramatic fall when VIX is below 13.


Nasdaq presses on with plan to clear forex derivatives in Europe
Philip Stafford – Financial Times
Nasdaq is to press ahead with its long-touted plans to clear some foreign exchange instruments in Europe as local regulators finalise mandatory rules for trading off-exchange derivatives.
The US-Nordic group has lodged an application in recent weeks with European regulators for approval to clear a range of non-deliverable forwards (NDFs) and options, according to two people familiar with the application. Nasdaq declined to comment.

LedgerX Hopes to Establish First U.S.-Regulated Futures Exchange for Bitcoin
Yuliya Chernova, The Wall Street Journal
A new startup out of New York called LedgerX LLC has recruited big financial-industry names to its board of directors and raised venture funding from Lightspeed Venture Partners, Google Ventures and others to add a dose of legitimacy to the bitcoin market.
LedgerX hopes to become the country’s first bitcoin futures exchange with Uncle Sam’s blessing. It submitted applications to the U.S. Commodity Futures Trading Commission, or CFTC, which regulates U.S. futures and options exchanges, in late September to be approved as a derivatives exchange with bitcoin as the underlying asset to be traded, according to LedgerX co-founder and Chief Executive Paul Chou.

Regulation and Enforcement

FX Traders’ Facebook Chats Said to Be Sought in EU Probe
Aoife White and Gaspard Sebag – Bloomberg
Foreign-exchange traders’ messages on Facebook Inc. (FB) are being sought by European Union antitrust regulators as they expand a probe into alleged collusion between banks beyond work e-mails and instant messages, two people with knowledge of the case said.
Banks have been asked to supply all communications between traders, including social media, said three people who didn’t want to be named because the EU’s requests are private. The EU suspects that some e-mails and online messages have been erased to destroy signs that traders were illegally swapping information, one of the people said.
***JB:  You’d think people have seen enough of actors getting their nude photos unwillingly bandied about to know that the internet is forever and never forgets.  Consider anything you send via the internet to be a matter of public record (regardless of whether it is or not) and you’ll be a lot better off for it.


Using Puts and Calls to Play a Chaotic Stock Market
Steven M. Sears – Barrons
For an endeavor that requires making just one of two choices, investing is surprisingly complex. That such intense analysis and debate are applied to determining whether securities should be bought or sold would be comical were it not for the fact that the cumulative outcome of these decisions influences the world.

Tips On Trading Options With Earnings Season In Full Tilt: Apple Inc., Google Inc
The markets ended last week with strengths in the broader markets up 0.75 percent, while the small caps lagged about +0.2 percent.
The small caps were early trend identifiers. Small caps recently exhibited nervousness not shared by the S&P or NASDAQ. The VIX also held strong, which should add to the uncertainty going into the week.

Twitter options pricing in big stock move
Tomi Kilgore, MarketWatch
The options market is expecting a big move in Twitter’s stock on Tuesday, the day after the social-media company reports quarterly results, roughly in line with the sharp post-result selloff that the stock of other Internet companies has suffered.
Twitter TWTR, -8.11%  is scheduled to reveal its quarterly report after Monday’s closing the bell, the fourth since the company went public last November. The current implied one-day move for the stock on Tuesday, based on an options strategy known as a “straddle,” is about 14% in either direction, according to Jim Strugger, a derivatives strategist at MKM Partners.


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