JLN Options: Creator of ‘Fear Gauge’ Sounds Alarm Over Volatility-Linked ETFs; Pimco runs risks in turning up the ‘vol’; Swaption Volatility Gap Shows Complacency on Fed Pace, UBS Says

Jun 27, 2014

Lead Stories

Creator of ‘Fear Gauge’ Sounds Alarm Over Volatility-Linked ETFs
Chris Dieterich – The Wall Street Journal
The man who created a widely watched measure of stock-market volatility is sounding the alarm over exchange-traded products that try to track his index.
Robert Whaley, the inventor of the CBOE Volatility Index, or VIX, warned that investors aren’t getting what they pay for when they buy volatility-linked products. While professional investors typically bet on the VIX itself (dubbed “the fear gauge”) to protect against sudden market declines, small-time traders must  purchase the exchange-traded products as their insurance against big drops .

Pimco runs risks in turning up the ‘vol’
Stephen Foley and Michael Mackenzie – Financial Times
It was a tantalising introduction. Bill Gross, Pimco’s “Bond King” and founder of the world’s largest fixed income fund, promised to impart the secrets of his extraordinary success to an audience of financial advisers in Chicago. “I’ll be handing you the keys to the Pimco Mercedes,” he told them.
Unlike smaller fixed income funds that might just buy and sell bonds, the $230bn Pimco Total Return fund is a clever user of derivatives trading strategies, Mr Gross went on to explain, and Pimco is one of the biggest sellers of insurance against market volatility.

Swaption Volatility Gap Shows Complacency on Fed Pace, UBS Says
Liz Capo McCormick – Bloomberg
Low volatility on options on interest-rate swaps expiring in December for one-year yields shows traders are underestimating the risk of monetary policy changes by the Federal Reserve in 2015, according to UBS AG.
Volatility on six-month options, known as swaptions, on two-year rates is about 75 percent greater than on the similar-maturity contracts on one-year swap rates. Because the options on one-year swaps give a view on yields through the end of 2015, the gap shows the volatility market is pricing in very little action from the Fed next year, followed by more forceful policy in 2016, said UBS, one of the 22 primary dealers that trade with the central bank.

Higher Rates Imperil Best Gain for Utilities Since 2000: Options
Lu Wang – Bloomberg
For the first time since 2000, utilities are handing investors the best gains in the stock market. Options traders are betting that it won’t last.
Power producers have rallied 15 percent this year, the most among the 10 industries in the Standard & Poor’s 500 Index. Demand for options that protect against future losses is rising and bearish puts outnumber bullish calls by more than 2-to-1 in an exchange-traded fund tracking companies such as Exelon Corp. and Duke Energy Corp.

Low volatility is a myth, and that’s good news
Jeff Cox – CNBC
Investor wariness of stock market volatility may only appear to be low.
Traditional measures of market complacency show it at levels rarely seen since before the financial crisis—and headed toward historic troughs. Most notably, the CBOE Volatility Index has been on a consistent downtrend throughout 2014, despite an unexpectedly weak economy in the first part of the year and almost daily geopolitical disruptions.
Forget standard volatility though, for a minute.

‘Manageable storm’ looms for markets: Deutsche
Katy Barnato – CNBC
Deutsche Bank cut its global growth forecast on Friday and warned a summer tempest could await financial markets.
The German bank downgraded its estimate for U.S. growth this year by nearly a percentage point, down to 2.3 percent from 3.1 percent.

High Touch Trading Has a Bright and Profitable Future
John D’Antona Jr. – Traders Magazine
The death of voice broking or high-touch trading isn’t going to happen any time soon.
While electronic trading and algorithms have revolutionized the equities market and trading, as well as thinned the ranks of high-touch sales traders, these telephony-based traders still have value – a lot of value. That’s the findings of a new report from Greenwich Associates.

Traders Salaries Expected to Grow 10 Percent in 2014: Options Group
John D’Antona Jr. – Trader’s Magazine
This year is going to be an OK one for traders and their wallets, according to a new study.
The report noted compensation trends are most favorable for investment banking, equity derivatives and credit professionals in the U.S., EMEA and Asia. In the U.S. and EMEA, Options Group forecasts that average compensation in rates will decrease 15 percent to 20 percent, while compensation will increase around 10 percent for commodities, securitized products and cash equity professionals.

Regulation and Enforcement

EU throws down gauntlet to U.S. over derivatives
Huw Jones – Reuters
The European Union said it will help build a seamless global market in financial derivatives by accepting rules used in five countries, adding the United States would get the green light too if it showed flexibility.
After the 2007-09 financial crisis in which derivatives like credit default swaps played a key part in creating uncertainty, countries across the world have introduced rules to make the market more transparent and safer.

Options Education

Stretching the Price
Brandon Wendell – The Options Insider
Most traders are familiar with moving averages. They are a useful technical tool for identifying the direction and strength of a trend. However, many traders overlook a very useful characteristic of price that allows us to identify a trading opportunity using moving averages. That characteristic is elasticity.


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