JLN Options: CME Ex-CEO Tackles Options Market Risk in New Clearinghouse Role; BSE to start volatility index following NSE launch; Why it’s tough to be a stock market bear

Feb 26, 2014

Observations & Insight

A Krugman Conundrum: Beware the single metric
Doug Ashburn, John Lothian News

In today’s JLN Financials newsletter, the austerity debate again rears its head, this time in the form of a blog entry by economic heavyweight Paul Krugman. Dr. Krugman, a leading advocate of stimulus, stimulus and more stimulus to combat the economic ills of the past five years, has gone to great lengths to shout down any who advocate austerity as the path forward.

(To read the rest of this piece, please visit the JLN Blog at )

Lead Stories

CME Ex-CEO Tackles Options Market Risk in New Clearinghouse Role
Nandini Sukumar – Bloomberg
Craig Donohue, the new chairman of Options Clearing Corp., says he’s focused on improving the organization’s operations after regulators criticized how it managed risk in the $1.2 trillion U.S. equity options market. “My focus and part of my role and responsibility is to make sure we have a highly compliant organization,” Donohue, who became OCC’s chairman in January, said during a phone interview yesterday. He previously served as chief executive officer of Chicago-based CME Group Inc., owner of the world’s biggest futures exchange.

***DA: If you missed our recent interview with Craig, check it out here:

BSE to start volatility index following NSE launch
National Stock Exchange (NSE) on Wednesday started trading futures tied to its VIX volatility index, while rival BSE said it will seek the capital markets regulator’s approval within two weeks to introduce similar contracts.

***DA: India’s exchanges recognize volatility as a key growth area for the industry.

Volatility index futures ends flat on debut
The Hindu Business Line
Futures on volatility index, India VIX, started trading on the NSE on Wednesday with three weekly contracts — the near-contract expiring March 4, mid-contract expiring March 11 and the far-contract expiring March 18. he near-contract logged a volume of 2,710 and the mid-contract booked a volume of 209.

Why it’s tough to be a stock market bear
Financial Post
Five years after the credit crisis, equity markets are showing zero tolerance for bears. The Standard & Poor’s 500 Index’s 5.8 percent drop between Jan. 15 and Feb. 3 prompted hedge funds to push short sales to the highest level since 2012 and spurred the fastest withdrawals from exchange-traded funds in more than a year. Both moves backfired amid a three-week rally that restored $1.5 trillion to American share prices.

***DA: They weren’t wrong, just early.

Stock market investor fears expected to rise
Volatility in the stock market, as measured by the so-called fear index, will likely rise the farther we get into 2014, but strategists aren’t seeing that as a necessarily bad thing.

***DA: It is amazing that, though these little mini-scares make it seem like sheer panic, vol has yet to rise even to its long-term average.


CBOE Holdings Rating Increased to Buy at Thomson Reuters/Verus 
Ticker Report
CBOE Holdings was upgraded by stock analysts at Thomson Reuters/Verus from a “hold” rating to a “buy” rating in a report issued on Monday, AR Network reports.

Outstanding Contribution – William J. Brodsky
Best Options Exchange
Most Innovative Exchange Technology – Options
The Chicago Board Options Exchange (CBOE) announced that it has received industry awards recognizing the exchange’s leadership in three areas. Executive Chairman William J. Brodsky received Wall Street Letter’s (WSL) “Outstanding Contribution” award at WSL’s Institutional Trading Awards on February 25. He also accepted the “Most Innovative Exchange Technology – Options” award on behalf of CBOE.

***DA: Kudos to our friends at CBOE.

ISE and ISE Gemini Named “Best Options Trading Venue” at Wall Street Letter 2014 Institutional Trading Awards
The International Securities Exchange Holdings, Inc. (ISE Holdings) announced today that it received the Wall Street Letter 2014 Institutional Trading Award for “Best Options Trading Venue” for its two exchanges, ISE and ISE Gemini. In addition to that honor, ISE Holdings also received a second award for “Most Innovative Fee Structure.

***DA: Kudos to our friends at ISE.

Regulation and Enforcement

Options Clearing adds staff, capital amid regulatory scrutiny
Options Clearing Corp is significantly increasing its headcount and working capital levels to help satisfy regulatory scrutiny tied to its designation as a critical part of the U.S. financial market infrastructure, the company’s new executive chairman said on Wednesday.


What to do when the stock market is “wrong”
Just about everything was pointing to a short-term stock market decline. But the S&P 500 made a new all-time high yesterday. So here’s what you should do now

***DA: In the words of Lord Keynes, it can stay mispriced longer than you can stay solvent.

How to Sell High, but Keep on Profiting
Buy low. Sell high. Most investors think that only applies to stocks, but options traders know better. When options volatility is low, and stock prices are high, investors can lock-in profits by selling high-priced stocks and replacing them with relatively inexpensive bullish call options.

***DA: And if you are looking to buy back these stocks on a break, you may as well sell puts. That’s the beauty of options – there’s a strategy for every view.

Volatility strategy targets Petrobras
A large trader is combining stock and options to create a volatility play in Petrobras. The strategy involved 8,300 October 11 puts that were bought in one print for $1.29 on a wide bid/ask spread today, according to optionMONSTER’s Depth Charge tracking system. This is clearly a new position, as the strike’s previous open interest was a mere 21 contracts.

Videocast: March VIX protection (02/26/14)


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