JLN Options: China options debut gives traders tool to hedge volatile stocks, Stocks; Stock option launch drives rebound in mainland exchanges; Oil ‘contango’ puts profit in storage

Feb 9, 2015

Observations and Insight

Making A Call Around the Pits
by John J. Lothian

It seems like a lifetime ago, when I used to publish daily statistics in this newsletter about the percentage of open outcry trading versus electronic trading at the CBOT and CME. It was a fun daily exercise, especially when the CBOT was taking on the NYMEX/COMEX for the gold and silver contracts.

By that time, some 10 years ago, the statistics of electronic trading on the bonds or financial futures as a percentage the total volume were well over 90 percent electronic. So what took so long closing the pits?

The two key tests for the CME Group as a corporation were profitability and liquidity. Most of the futures pits, or the futures pits as a whole, failed both of these tests a long time ago.
Futures markets are about two things: price discovery and risk transfer. It has been clear to many the price discovery was no longer happening in the pits. And without price discovery, there can be no risk transfer.

Read the rest of the commentary at JohnLothianNews.com

Lead Stories

China options debut gives traders tool to hedge volatile stocks, Stocks
The Business Times
China will start trading equity-linked options for the first time on Monday, giving investors a new tool to manage risk in the world’s most-volatile major stock market.
Contracts on the China 50 ETF, an exchange-traded fund tracking some of the country’s biggest companies, will begin changing hands on the Shanghai Stock Exchange as part of a trial that Haitong Futures Co. predicts will eventually expand to options on equity indexes and single stocks. It’s the first new equity derivative allowed by Chinese regulators since the 2010 introduction of index futures, a market that has grown about 10- fold in the past four years.

Stock option launch drives rebound in mainland exchanges
Global Times
Mainland bourses rebounded Monday after several sessions of decline, lifted by gains in blue-chip stocks including securities, banking and insurance companies.
The benchmark Shanghai Composite Index closed up 0.62 percent or 19.22 points at 3,095.12 points on Monday, while the Shenzhen Component Index rose 0.71 percent or 77.04 points to 10,868.14 points.

Oil ‘contango’ puts profit in storage
Gregory Meyer and Ed Crooks – Financial Times
Anyone seeking to understand oil’s fall should watch what is happening in Cushing, Oklahoma.
The little city of 7,900 people is also home to tanks capacious enough to hold 70.8m barrels of crude, by the government’s latest reckoning. There, oil stocks have doubled since October to 41.3m barrels — a tenth of US commercial inventories. In a “few months it will be full”, Alan Swanson, chief financial officer at tank owner Plains All American Pipeline, told analysts last week.

The Week in Volatility Options and ETPs – 2/2 – 2/6
Russell Rhoads – CBOE Options Hub
A big up week for the S&P 500 resulted in the VXST – VIX – VXV – VXMT term structure curve returning to contango after going into backwardation to end the previous week. This sort of action is wearing thin for guys on the floor. I was even pulled aside and told that there seems to be a sort of ‘seller’s exhaustion’ when the market moves dramatically in one direction or another.   I’ll speak to that topic more after discussing the ETPs.

Videocast: VIX volume is falling

‘Peasants With Pitchforks’ Seen If Profits Get Any Fatter
Michael P Regan – Bloomberg
Rob Arnott, chief executive and co-founder of Research Affiliates LLC, recently picked up the phone to share some thoughts on the current state of the stock market.
Arnott is a pioneer of investing strategies that could be considered “unconventional” if they weren’t slowly but surely becoming more conventional. Among them is the idea of “fundamental indexing,” or weighting stock portfolios by economic metrics like sales, dividends and cash flows rather than the market value of the companies. (The term “smart beta” came later.)

Greek Risk Draws Global Concern on Lehman Echo Warnings
Isobel Finkel, Simon Kennedy and Theophilos Argitis – Bloomberg
A country accounting for less than 0.4 percent of the world economy is again rattling those responsible for three-quarters of it.
Greece topped the list of worries for Group of 20 finance chiefs as they started talks in Istanbul on Monday with calls for the nation and its creditors to strike a new aid deal amid concern its membership of the euro has never been more tenuous.

The fault lines in India’s currency derivatives market
Mobis Philipose – LiveMint
With India’s exchange-traded currency derivatives market, what you see is not what you get. Reported volumes and open interest have risen 73% and 115%, respectively, since mid-2014, after regulators relaxed some of the draconian measures they had taken in 2013.
Open interest across exchanges has risen to fairly healthy levels of $5.6 billion, or only about 20% lower than the pre-crackdown days. But this doesn’t mean that the market is flourishing.


The Top Five Reasons CBOE Mobile Has Been Named “Best App”
CBOE Options Hub
Earlier this week, CBOE Mobile was named “Best Mobile Application” at the fourth annual Wall Street Letter Institutional Trading Awards in New York City.  We’re not surprised.  CBOE is the “go-to” source for options and volatility information and we’re working to make our educational resources more accessible and expansive than ever before.
Dive into CBOE products — including equity, index, exchange traded product, Weeklys, LEAPS, FLEX options, and VIX options and futures—through CBOE Mobile.  A world of options and volatility trading resources are just an app away.


What Is Volatility Saying?
JJ Kinahan – Forbes
February is off to a fast start. The S&P 500 (SPX) rallied in three of the last five trading sessions and erased nearly all of its losses from January. SPX got a lift from the short-term recovery in crude oil prices despite a nearly 80-year high in oil inventories. A January employment report that blew well past most reasonable estimates helped last week, too. Now the next round of earnings, energy price swings, plus U.S. and global economic data and any ongoing speculation for the speed of expected Federal Reserve interest rates fill out a list of potential catalysts that could test the market’s resilience.

Options Education

How Time Decay Affects the Value of VXX
Adam Warner – Schaeffer’s Investment Research
If CBOE Volatility Index (VIX) futures sit in contango, iPath S&P 500 VIX Short-Term Futures ETN (VXX) gradually loses money. I’m pretty sure everybody agrees on that point. So why does that happen?
The conventional wisdom is that VXX loses money selling the shorter cycle and then paying a higher price for the ensuing cycle. But Vance Harwood makes a compelling case that this assumption is actually incorrect. I can’t do his piece justice with a simple excerpt, so let me try to explain.


CBOE RMC, March 4-6 2015, Carlsbad California
Now in its 31st 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.
***John Lothian News is a media sponsor for this event.

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