Observations and Insight

CBOE RMC Highlights – Part 2
Doug Ashburn – JLN

Today marks day two of the CBOE Risk Management Conference taking place in Carlsbad, California. Outside the conference hall it is mid-70s and sunny all week – a far cry from the single-digit temperatures in Chicago.

Inside the conference hall it is sunny as well, or so it appears from my vantage point in Chicago. For those wishing to stay abreast of the happenings in Carlsbad, I encourage you to click over to the CBOE Options Hub,  http://www.cboeoptionshub.com/ where more posts have been uploaded within the past 24 hours, including:

– Plan Fiduciaries Discuss Trends in Institutional Options and Volatility Product Usage
– Presentations on Interest Rate Volatility and the VXTYN Index
– The Art of Hedging Discussed at RMC

Options Hub is the next best thing to being there.

Lead Stories

CFTC Study Confirms Impact of Volatility Trading on VIX
Mark Melin – ValueWalk
The success of volatility futures having grown significantly over the past 4 years. Volatility futures trading, once a dream, represented nearly 20 percent of transaction revenue at the Chicago Board Options Exchange in 2013 through the VIX contract and trading in less liquid and generally nontransparent over the counter markets (OTC) thrives as well. The question is: does this very trading in volatility futures impact the underlying price?
***DA: If Schroedinger’s cat was trading VIX just as a tree was falling in the forest…

Hedging demand signals confidence in U.S. stocks shaky
Francesco Canepa – Reuters
Investors put more money in February into hedging against a U.S. stock market fall than in any month for almost two years, signalling confidence in the market’s surge to all-time highs may be shakier than it seems.
The prospect of a rise in U.S. interest rates and concerns a sell-off could be on the cards have stoked demand for exchange traded funds (ETFs) tracking the VIX volatility index. The VIX measures the cost of U.S. stock options and tends to rise when the S&P 500 index falls, and vice versa.
***DA: Nothing scarier than a return to interest rate normalcy?

Big Options Bet Sees Oil ETF Rangebound into 2017
Chris Dieterich – Barron’s
As traders grapple with when to call the bottom on oil prices, one large options trade on Thursday suggests somebody is convinced that oil will stick within a stable range for nearly two years.The target of the trade was the $2.7 billion United States Oil Fund (USO) fund, which plunged in tandem with per-barrel crude prices starting last summer. The crude-tracking exchange-traded fund declined nearly 60% from its June 2014 high through the end of January, but has since recouped about 15%, to $18.70 a share, in recent trading.
***DA: Or that it will be stable for long enough to see the back end of the vol curve come down a bit.

Apple Will Join the Dow Jones Industrial Average
Michelle Davis – Bloomberg
Apple Inc. was added to the Dow Jones Industrial Average, ending a banishment that kept the world’s largest company out for years before a stock split made its shares palatable to the price-weighted measure.
The changes will push the number of technology-related companies in the 30-member gauge to six and boost their influence even more as Apple joins Microsoft Corp., Intel Corp., International Business Machines Corp., Cisco Systems Inc. and Visa Inc. AT&T is being kicked out after falling 4.5 percent in 2014. The changes will take effect after the close of trading on March 18.
***DA: Apple in; AT&T out. The torch (actually it is more likely a flashlight app) has been passed.

Bond index mix creates ingredient shortage
Tracy Alloway – Financial Times
Faced with the difficulty of baking a bond fund cake without the requisite ingredients, fund managers are having to get creative to meet — and ideally beat — their benchmarks. Creating artificial duration is one way of doing so, with a smorgasbord of derivatives — from swaps to futures and options — all available to impart that all-important duration risk.
***DA: When prices get so distorted by competition with central banks, bond rates cease to reflect the inherent risk in holding corporate paper. This will not end well.

Schwab’s Service for Investors Seeking Thrifty Advice Raises Eyebrows
Tara Siegel Bernard – NY Times
Charles Schwab is poised to introduce an investment service for consumers who crave low-cost personalized advice but do not have a lot of money to invest. And it is dangling an attractive lure in front of investors, in a way that its competitors have not: It says its service is free.
But whether it is truly free, or is just intended to seem that way, is up for debate.
***DA: Free simply means the costs are buried elsewhere.
***JB: My dad was an attorney.  He always told me his advice was worth exactly what you paid for.

Putting an End to Broker Cockroaching
Joshua M. Brown – The Reformed Broker
In my 2012 book, Backstage Wall Street, I spend about a quarter of my word count talking about the stuff I’d seen at some of the brokerage firms I’d worked at. I even reprinted the scripts they were teaching us, in the hopes that the reader would be better prepared for the next incoming cold call (yes, they still cold call).
Anyway, in a Wall Street Journal story today about some of the worst brokers from the Wolf of Wall Street era, I came across an amazing stat that defies logic (emphasis mine):


Exclusive: Concannon says BATS is too busy to do an IPO anytime soon
James Dornbrook – Kansas City Business Journal
Rumors that BATS Global Markets is considering an initial public offering are false, said Chris Concannon, who will become CEO on March 31.
In an interview with the Kansas City Business Journal, Concannon said he thinks the rumors mostly reflect wishful thinking by investors. BATS shareholders invested about $160 million in the company through the years, and they’ve received more than $500 million in dividends in the past two-plus years alone. So, he said, many investors would love to see BATS do an IPO to let them to get a piece of the action.
***DA: Patience, Grasshopper.

The year that was in exchange-traded derivatives
James Rundle – Financial News
Going purely on volumes, 2014 was a good year to be a commodities exchange. Less so for interest rate derivative venues, according to data on exchange-traded derivatives from the World Federation of Exchanges.

LSE opens LCH door to ICE, Eurex, CME
Luke Jeffs – Futures & Options World
The London Stock Exchange has underlined its commitment to “open access” by opening the door to its largest rivals and hinted again at its imminent futures exchange launch.
Speaking after he announced 2014 revenue up a quarter on Thursday, LSE chief Xavier Rolet told FOW: “Our commitment to open access means portfolio margining is open to everyone. ICE, Eurex, CME or any other large exchange can apply to become customers.”
***DA: In the new exchange paradigm, there is no such thing as “my turf” “your turf” or “home turf.”

Regulation and Enforcement

U.S. Banks Pass Stress Tests As Capital Plan Ruling Looms
Antoine Gara – Forbes
The Federal Reserve said on Thursday all 31 banks it tests as part of its comprehensive capital adequacy review held minimum capital levels to withstand another financial panic. No banks failed the Fed’s so-called stress tests, however, America’s largest lenders still need to hear whether their capital plans, which govern dividend and share buyback activity, will be approved by the regulator.
***DA: We’re all completely safe now. That was easy.


“Sell Mortimer Sell!”The Options Insider
Mike Zarembski – The Options Insider
The Orange Juice futures market is currently in a battle between large speculative and commercial traders according to the most recent Commitment of Traders report. For the week ending February 24, non-commercial traders were short a new 2,600 contracts, while commercial traders were adding to their net-long position by adding nearly 2,700 new net-long positions to stand at 2,849 contracts.   

Spot VIX and the Batch of ETFs in the Pipeline
Adam Warner – Schaeffer’s Investment Research
We all (hopefully) know the myriad problems associated with buying and holding volatility exchange-traded funds (ETFs). But perhaps that’s about to change. What if I told you there was a way to buy spot CBOE Volatility Index (VIX)?
You would probably say “that’s ridiculous.” Just go long Friday’s close and close out every Monday. VIX averages about a 2% lift on Mondays, and you’ll double your money in under one-and-a-half years.

VIX ETP Traders Anticipate More Volatility Ahead
Tom Lydon – Seeking Alpha
As the equities market reached new heights and market participants became more complacent, some investors have been quietly building up their exchange-traded product exposure to the CBOE Volatility Index, or VIX, anticipating a pullback in stocks.


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