JLN Options: The Bullish Implications of a Doubling in Bearish Brexit Hedging; Brexit Vote Drives Euro Stock Market Volatility to Highest in Over a Decade Versus U.S.; What the gold option market tells us

Jun 22, 2016

Lead Stories

The Bullish Implications of a Doubling in Bearish Brexit Hedging
Lu Wang – Bloomberg
Bank of America’s Skew Index surges as U.K. prepares to vote
Cautious stance means limited downside should ‘leave’ prevail
The price of protection is skyrocketing across financial markets ahead of tomorrow’s U.K. referendum, a signal to one researcher that the market fallout will be muted. Bank of America Corp.’s Skew Index, which measures demand for hedging against large swings in global equities and currencies, has more than doubled this month to 1.50, and the gauge reached 1.63 last week, the highest level since October 2011, during the height of Europe’s sovereign debt crisis.

****SD: This vote can’t come soon enough. I’m running out of amusing asides.

Brexit Vote Drives Euro Stock Market Volatility to Highest in Over a Decade Versus U.S.
Mike Bird – WSJ
Europe’s political and financial establishments are now fully awake to the possibility that the U.K. could leave the EU after its membership referendum on Thursday, and that’s setting up eurozone stocks for a wild ride. Volatility in the eurozone’s largest and most liquid equities has climbed to its highest level in more than a decade against their U.S. peers. Analysts are now suggesting there could be large declines in eurozone equity prices if the “Leave” camp triumphs on June 23. Some even think eurozone stocks would fare worse than the U.K’s.

What the gold option market tells us
Ole Hansen – TradingFloor.com
The gold market currently perceives the risk/reward as being heavily skewed to the upside. As the UK referendum has drawn closer, the price difference between out-the-money calls and puts have moved aggressively in favour of calls. This comes on the assumption that a Leave vote would have a much bigger positive price impact than the equivalent negative one on a vote to Remain.

Trading firms up margins to cover Brexit volatility
Sydney Morning Herald
Anxious brokers are forcing clients to stump up more cash than ever against trading positions on the results of Britain’s European Union vote in the hope of avoiding the catastrophic losses incurred when the Swiss central bank suddenly dropped its peg to the euro last year. In some cases, day traders and other retail risk-takers will need to post 12 times the normal ante to take a position in the movement of pounds sterling, which will dive sharply if Britons vote to leave the 28-member economic bloc and rally if the “Remain” camp wins.

Brexit Polls and Markets Disagree in Campaign’s Final Hours
Currency, equity markets bet on ‘Remain’ victory Thursday
Polls show race is deadlocked in final campaign stretch
Britain is in the final day of campaigning before its Thursday referendum on European Union membership, with opinion polls and financial markets at odds over the outcome

Beware choppy Brexit trading, banks warn clients
Enter at your peril: investment banks are warning clients to beware of volatile and unpredictable markets at the end of this week around Britain’s vote on whether to stay in the European Union. Banks including HSBC, UBS, Bank of America Merrill Lynch and Morgan Stanley have sent notes to clients warning them of the perils of illiquid trading conditions, which could disrupt the level of execution, liquidity and pricing they offer.

****SD: Tomorrow will not be a good day for systems to bug out, which means they will.

Brexit: FX Option and FRA Analysis
Clarus Financial Technology
With the referendum just around the corner, it would be amiss if we did not update our analysis of EUR/GBP and GBP/USD FX Options ahead of the vote. We also take a look at GBP FRA activity, particularly the FRA switch over the 24th June.

German Options Market Far From Convinced Brexit Is Settled
Carolynn Look – Bloomberg
The sigh of relief breathed by investors across Europe as polls showed a drop in the odds of a U.K. secession is not being shared in Germany’s options market. While a surge in optimism that Britons will vote to remain in the European Union spurred a 4.9 percent rebound in the benchmark DAX Index in the past three days, the cost of hedging against declines has continued climbing and is now at a six-year high versus bullish calls. The benchmark gauge rose 0.4 percent at 10:30 a.m. in Frankfurt.

Brexit Matters Less Than Yuan Devaluation on VIX Index: Chart
Just before the U.K.’s referendum vote, a one-week measure of the Chicago Board Options Exchange Volatility Index shows it’s barely registering compared with other market shocks including last year’s yuan devaluation, the Russian ruble crisis, the downgrade of U.S. debt and the global financial crisis of 2008. Traders may be tracking odds offered by bookmakers more than what polls indicate, with Ladbrokes’ odds implying a 78% chance the U.K. will remain within the European Union.

Shifting to the centre
Global Investor Magazine
Dave Simons reports on the continuing efforts to bring viable central-clearing solutions for US securities lending trades
As the capital realities of Dodd- Frank and Basel III sink in, the prospect of enhanced stockloan efficiency offered through a central counterparty (CCP) continues to loom large among securities finance participants. While centrally cleared lending has, until fairly recently, been relatively subdued stateside – with a lone outfit, the Options Clearing Corporation (OCC), handling the dealer-to-dealer market only – that is likely to change as key players explore new strategies for improving margins.

VIX Up. Stocks Swings Down. Investors Expect Trouble Beyond Brexit
Expectations for stock swings have picked up even as actual moves in the market have remained benign. Something’s gotta give, right? Just last week on June 13, the CBOE Volatility Index closed at 20.97, which marked its highest level since late February. Currently, the index is up 2.5% to 18.82.


CBOE Holdings Announces Date of Second-Quarter 2016 Earnings Release and Conference Call
Press Release
CBOE Holdings, Inc. (NASDAQ: CBOE) will announce its financial results for the second quarter of 2016 before the market opens on Friday, July 29, 2016. A conference call with remarks by CBOE Holdings, Inc. senior management will begin at 7:30 a.m. Central Time (CT). A live audio webcast of the conference call, and the presentation that will be referenced during the call, will be available on the Investor Relations section of CBOE’s website at http://ir.cboe.com under Events & Presentations. The presentation will be archived on the company’s website for replay. In addition, participants may listen to the live conference call via telephone by using the dial-in numbers listed below.

BME weekly options market-making delayed
Julie Aelbrecht – Futures & Options World
Quant trading firm Susquehanna International Group has decided to postpone to next month its market-making activities on the Spanish exchange’s new weekly options contracts set to launch next week. Susquehanna, set to be the first liquidity provider for the Bolsas y Mercados Espanoles’ (BME) weekly options, will start its market-making activities on these contracts in the second half of July, a representative from BME told FOW. The launch of the weekly options is still set for June 29 but market-making will only start later next month due to certain clearing partners not being ready to clear the weekly options, according to a source close to the matter.

Regulation & Enforcement

New trading rule is ‘extreme overkill’—commentary
Bart Chilton – CNBC
One would not expect Coca-Cola to divulge their secret recipe for the world-renowned soft drink…nor is it required by government. The same is true for other proprietary trade secrets and intellectual property. That, however, could all change by the end of the year if some at a little-known federal agency get their way.

MiFID II data quality and reconciliation: urgent preparation needed
Patrick Thornton-Smith – Finextra
It was less than half a year ago when the European Commission confirmed that the introduction of MiFID II would be delayed a year, to January 2018. At that time, there was a general feeling of relief from most financial institutions facing a huge upheaval to be compliant with the new directive. Now that we’re a few months on, surely this delay has meant that most firms are well into their MiFID II projects and, with around 18 months to go, must be feeling that warm glow of confidence in being well inside project timeframes? It appears not. A recent flurry of articles, industry analysis and commentary seem to indicate that all is not well in the preparation of the new trade reporting requirements.

EMIR not king
Ceri Jones – Global Investor Magazine
Although EMIR implementation has acquired many costly complexities for both buy and sell-side institutions, many major firms have relegated the EU’s derivatives regulation behind MiFID in their priorities. Some will reportedly be complying on a shoestring using laptop based systems. The deadlines for EMIR are looming, with the initial margin provisions for OTC derivatives applying from September 2016, where both counterparties have an aggregate average in uncleared derivatives above EUR3trn. For the largest derivatives participants there is now little time to finalise changes to existing systems and procedures and put in place the required documentation.

****SD: “Hold on, it’s here somewhere.” *rifles aimlessly through drawers crammed with receipts*

SEC will use whistleblower tip to sue Merrill Lynch for investment that lost 95%
The Securities and Exchange Commission is preparing a civil enforcement case against Merrill Lynch over an investment that fell as much as 95% in value and was marketed in a way that one of the firm’s financial advisers called “borderline crooked,” people close to the probe said. The expected case against the brokerage arm of Bank of America Corp. underscores some of the risks of so-called structured notes, securities custom-built by banks out of options and other derivatives and often sold to retail investors.

MAR will streamline practices – experts
Alice Attwood – Futures & Options World
The Financial Conduct Authority’s introduction on July 3 of European market abuse regulation will force firms to adopt better practices and deliver benefits beyond basic compliance, experts have argued. The new set of rules is designed to improve transparency, safety and resilience with market surveillance over trading, compliance and operations functions to generate a wealth of data that firms can then use to their advantage.

Sebi eases trading requirements in currency derivatives segment
Economic Times
With an aim to ease trading requirements in the currency derivatives segment, markets regulator Sebi today said position limit linked to open interest will be applicable at the time of opening a position.


Trading Tech: Dash Financial Debuts Real-Time Transparency Feed
Traders News
The hunt for best execution in a fractured market has a new weapon. FinTech company Dash Financial, which provides technology for institutional trading, is introducing a new real-time transparency feed.

Algo-Logic Systems Launches FPGA Accelerated CME Tick-To-Trade System
Press Release
Algo-Logic Systems announces the release of their latest Field Programmable Gate Array (FPGA) accelerated CME Tick-To-Trade (T2T) System. The sub-microsecond trading solution is ideal for latency-sensitive trading firms that need deterministic response times to market opportunities. The CME T2T System is built using internally developed, pre-built FPGA IP cores that significantly reduce time-to-market and provide flexibility for customizations.


Indicator of the Week: Are Cheap Options Really a Better Deal?
Rocky White – Schaeffer’s Research
While option prices are based off of stock prices, option trading and stock trading are quite different. A buy-and-hold long-term investor does not have to worry about volatility. Option traders, on the other hand, have expiration dates to deal with, so volatility is key. Option prices consist not only of intrinsic value, but also of time value, which determines the implied volatility of the stock. The stock move must overcome this time value for the option to make a profit, and of course, the move must occur before the expiration date.

****SD: His broad conclusion: expensive options have been the best performers of late.

Options Skew, Implied Volatility, Calendar Spreads, and Options Traders
The Ticker Tape
There’s an important concept that options traders who trade calendar spreads should understand. It’s called skew. Skew is used in a few different ways, but in this article we’ll use it to quantify the difference between the implied volatilities of two options that make up a calendar spread. Importantly, we’re going to use skew to help make decisions before placing the trade

Measuring Brexit Tremors in American Auto and Energy Stocks
Anna-Louise Jackson – Bloomberg
Apprehension that Britons will vote to secede from the European Union is exerting influence great and small in disparate corners of the U.S. equity market. Here’s a map to where.


Misconception: Almost All Options Expire Worthless
Mark Wolfinger – About Money
One promoter who likes the idea of writing covered calls states that: “Over 75% of all options held until expiration expire worthless… That’s why you should do what the pros do and sell options to other people. After all, if most of them will expire worthless, why not collect some money for them today while they still have value?” Another advisor states that “Selling covered call options and cash-secured puts is a smarter strategy than buying options because 90% of options expire worthless.” The truth is that neither of these beliefs is close to being accurate. The first person quoted is just plain wrong in his beliefs because he ignores the risk associated with selling options. To me, his statements suggests that selling naked options — as an alternative to selling covered options — is a wise strategy. However, it is fraught with risk.

****SD: An age-old talking point gets another thrashing.

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