JLN Options: Covidien Inversion Deal Under Scrutiny by Options Traders; As Ebola Outbreak Spreads, Options Traders Bet on Pharma Firm Tekmira; Does George Soros know something we don’t about the S&P 500?

Aug 15, 2014

Lead Stories

Covidien Inversion Deal Under Scrutiny by Options Traders
Oliver Renick – Bloomberg
Speculation Medtronic Inc. (MDT) will modify its offer for Covidien Plc (COV) as sentiment worsens toward tax inversions is fueling demand for bearish options.
Covidien contracts betting on declines in the Dublin-based hospital products company are among the most expensive in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg on a measure of options costs known as skew. Medtronic, the Minneapolis-based device maker, said in June it will pay about $42.9 billion for Covidien in a tactic partly aimed at freeing $14 billion of overseas cash.

As Ebola Outbreak Spreads, Options Traders Bet on Pharma Firm Tekmira
Saumya Vaishampayan – WSJ
As West Africa deals with a severe outbreak of Ebola, investors are flocking to trade options on a company that is developing an experimental treatment for the deadly virus.Interest in Tekmira Pharmaceuticals Corp.TKMR +10.30% options has exploded this week. Total contract volume had been insignificant for most of the year, pushing above 10,000 contracts for the first time on August 4, according to Trade Alert data. Contract volume surged to nearly 50,000 on Monday, with the four top trades that day all in call options that expire in September. A call option gives the holder the right to buy the underlying stock at a certain price by a certain time.

Does George Soros know something we don’t about the S&P 500?
Barbara Kollmeyer – MarketsWatch
Oh, goody. It’s 13F time, when mere mortals like us get to see how the big boys rolled the dice in the last quarter.
Among the highlights, Soros Fund Management increased a bear-call bet on the S&P 500 in a huge way. The fund lifted a put position — a bet the market will go lower — on the S&P 500 ETF SPY +0.07% to its biggest size yet, in terms of value and portfolio percentage, making a 605% leap over the previous quarter.

Europe risks deeper economic crisis as Russia buckles and defaults mount in Ukraine
Ambrose Evans-Pritchard – The Telegraph
German bond yields plummeted to record lows and stock markets sold off across the world after Ukraine and Russia came to the brink of war, threatening to set off a financial shock and push Europe into deep recession.
Flight to safety sent yields on German 10-year Bunds tumbling to 0.97pc after Ukraine said its artillery had destroyed a “significant” part of a Russian armoured column that crossed the border into the Donbass. Yields on two-year notes turned sharply negative, implying that large investors are willing to pay the German state to look after their money.

Traders Lured to Bet on Power Overloads Worth Billions
Lynn Doan and Jonathan N. Crawford – Bloomberg
Payouts that reached almost $2 billion in the first quarter are attracting traders to the transmission-rights markets run by regional U.S. power-grid operators.
The rights are wagers on where power lines may overload, choking the flow and forcing higher-cost electricity to be substituted. They generated $1.12 billion in profits for traders within PJM Interconnection LLC’s market in the mid-Atlantic and Midwest, more than triple 2013’s total, according to the operator. Payments were $462 million in New York, $109.6 million in California and $103.2 million in Texas, reports from the grids show.

Fear Gauge Signals Time to Buy, Maybe Sell, Maybe Find New Chart
Michael P. Regan – Bloomberg
Being a contrarian on Wall Street and betting against conventional wisdom is so popular it makes you wonder whether the true contrarians are the ones who never stopped believing the conventional wisdom in the first place.
Perhaps nowhere is this more true than the VIX, the Chicago Board Options Exchange Volatility Index which is known as the “fear gauge” by some and probably the “let’s party gauge” by contrarians.

Finding the Smart Money in VIX Futures
Adam Warner – Schaeffer’s Investment Research
We haven’t looked at CBOE Volatility Index (VIX) futures much lately — maybe thanks to the fact that VIX itself has moved around a bit more than normal. But alas, all good things must come to an end. We’re back with a 13 full, which is pretty much the new normal, or at least the normal of this low-volatility regime we sit in.
So, how about we take a gander at what “seers” expect to see in VIX down the road.

This Volatility Cycle Strikes Again!
The cyclical two-month pop in stock market volatility (VIX) came early this month. Volatility’s latest spike took VIX levels up over 30% from its July lows in a hurry.
Volatility has made a habit of spiking higher about every two months, for whatever reason.  The cause for the volatility spike and subsequent market decline has typically been varied, whether war, economic data, or Reserve Bank musings, but it seems to always result in a similar outcome; a quick spike higher in the VIX (NYSEARCA:VIXY) that savvy investors can take advantage of.


Nasdaq breakdown causes ‘stuck’ orders
Nicole Bullock and Eric Platt – Financial Times
Nasdaq suffered a technological breakdown* on Thursday, which caused its flagship US equities exchange to fail to properly route trades with some investment firms.
The company said it had resolved an issue with “stuck orders”, or those buy or sell orders that fail to make their way through the exchange’s infrastructure due to a technical problem.

LBMA Silver Price Launches New Era in Pricing Precious Metals
Press Release (CME Group)
CME Group, the world’s leading and most diverse derivatives marketplace, and Thomson Reuters, the world’s leading source of intelligent information for businesses and professionals, have launched the new LBMA Silver Price mechanism in partnership with the London Bullion Market Association (LBMA). CME Group, Thomson Reuters and LBMA have joined forces to provide the over-the-counter spot silver market with a new transaction-based price-setting mechanism for the LBMA Silver Price that is IOSCO-compliant and fully electronic. CME Group will provide the electronic auction platform on which the price will be calculated, Thomson Reuters will be responsible for administration and governance and the LBMA will accredit price participants. The new LBMA Silver Price benchmark will be published and distributed by Thomson Reuters and will be available on the LBMA’s website.

Regulation and Enforcement

Fight Brews on Changes That Affect Derivatives
Peter Eavis  – NY Times
Tensions are building in an enormous market that nearly brought Wall Street to its knees in 2008.
Financial regulators are pushing for an arcane but crucial modification to the contracts that stand behind the $700 trillion global market for derivatives. The change is part of the regulators’ efforts to avoid the sort of systemic chaos that occurred after Lehman Brothers crashed.

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