Observations & Insight

Bits & Pieces
By JLN Staff

Our sign up for the London stop in the MarketsWiki Education World of Opportunity European tour is up and running. Go HERE to find the sign-up page. If you can’t use our Google form, please email me at johnlothian@johnlothian.com with the names of the attendees, their email addresses and your contact information.

Today also marks the AD era for John Lothian & Co., as in After Doug. We will now find out just how much we will miss him on a daily basis.

Our A Leg To Stand On winner of the Geneva Trading Rocktoberfest tickets was Evan Loftus of Eris Futures. Congratulations Evan. If anyone is still interested in buying tickets for the October 6 event at City Winery in Chicago, you can find them here


OCC Cleared Contract Volume Up Two Percent in September; Securities Lending Activity Up 29 Percent in September and 39 Percent Year-to-Date
OCC, the world’s largest equity derivatives clearing organization, announced today that cleared contract volume in September was 367,641,787 contracts, up two percent from September 2015 volume of 361,537,608 contracts. OCC’s year-to-date average daily cleared contract volume is down two percent from 2015 with 16,501,149 contracts in 2016.

Lead Stories

How Would a Cubs World Series Victory Impact VIX?
Russell Rhoads – CBOE Options Hub
The baseball regular season came to an end yesterday and the Chicago Cubs are positioned to make a historic run that most expect will end in a World Series victory. See what happens when a trader takes control of a team….
Since many people thought this would never happen, it may also be thought of as a black swan event and we all know that black swans have a dramatic impact on market volatility and show up in an elevated level for the Chicago Board Options Exchange Volatility Index, commonly known as VIX. So I ask the question that I care the most about, “How does a Cubs World Series victory impact VIX?”

****SD: Rhoads is smart, and thus also includes a section on what will happen if hell freezes over.

Funds go exotic with put-write options to stem volatility
Rick Baert – Pensions & Investments
Put-write equity options are finding their way into more pension fund allocations to protect against volatility and, in some cases, take the place of fixed income as an income provider.

What Options Markets Tell Us About Future Volatility [Video]
Pravit Chintawongvanich, Macro Risk Advisors strategist, takes a look at options markets and what they say about where investors are bracing for volatility. He speaks with Bloomberg’s Oliver Renick, Julie Hyman and Scarlet Fu on “Bloomberg Markets.”

What Happened to Gold Market Volatility? [Video]
In today’s “Futures in Focus,” Alan Knuckman of Bulls-Eye Options and Bloomberg’s Alix Steel examine the lack of volatility in the gold market. They speak on “Bloomberg ‹GO›.”

Deutsche Bank: 5 scenarios for the German bank — FT.com
Martin Arnold – Financial Times
The travails for Deutsche Bank are far from over — even if John Cryan, the bank’s British chief executive, is now rushing to settle the US Department of Justice’s probe into alleged mis-selling of mortgage securities, the toxic products at the heart of the financial crisis.

The Chart of the VIX Could Signal the Calm Before the Storm
Timothy Collins – The Street
I’ll often see technical analysis flying around for leveraged ETFs or the Volatility Index (VIX) and, while I won’t use them for definitive trades, I will use them for information. Any time we get into derivative technical analysis or derivatives of derivatives, the consistency of the variables is too skewed to make a singular conclusion of trade, but they should provide some expectation going forward.

Russell Investments 2016 Global Market Outlook Q4 Update
Russell Investments
Russell Investments today released its 2016 Global Market Outlook – Q4 Update, offering the latest economic insights and market forecasts from its global team of investment strategists, which help guide the firm’s multi-asset portfolios and services.
Russell Investments’ strategists anticipate volatility in the final quarter of 2016, as markets absorb the U.S. election results, the Italian referendum and likely U.S. Federal funds rate tightening. The strategists’ outlook for lackluster global economic growth remains intact from the previous quarter. The team expects global bond yields to rise modestly as inflation pressures in the U.S. are offset by deflation in other developed markets. In currency markets, the U.S. dollar looks set to test previous highs, while the British pound remains at risk as investors focus on the full implications of Brexit.

M&A Is a Sign of Economic Health
Bob Lang – CBOE Options Hub
Last year was a record year for M&A, but going unnoticed in 2016 is the plethora of mergers that have taken place across many sectors. Whether it is airlines, media, semiconductors or chemicals – this year has been one of the biggest on record in size and scope. Yet, one wonders why so many mergers are happening with the stock market at/near all time highs just about the entire year? The worst of course occurred during the first six weeks of the year and it has been up ever since.

****SD: A related story from Traders Magazine — IPOs Could Prime Trading Pump Ahead of Jobs Data

More SPXW and VIX “Election Spread” Expiration Dates for Targeted Strategies
Matt Moran – CBOE Options Hub
As the November 8 date for the U.S. Presidential election approaches, I have heard quite a bit of interest from investors in the use of SPX and VIX options and VIX futures with various expirations over the next six weeks. Added expiration dates provide investors with the opportunity to implement more targeted buying, selling, hedging and spreading strategies.


Revitalized Philly Stock Exchange is relocating again
Joseph N. DiStefano – Philly.com
The Philadelphia Stock Exchange, an occasionally mobile institution that has migrated among the Old Customs House, the First Bank of the United States, the Sofitel tower, and other landmarks since its 1791 founding at what is now City Tavern, plans to rise from beneath Market Street.

What Options launch means for commodity exchanges
Dia Rekhi – Economic Times
After a path of consolidating risk, revamping surveillance and warehouse practices in the commodity derivatives market, Sebi has taken the first cautious step for its growth by announcing that exchanges can launch options in the 13-year old market.

MCX Looks To Launch Options Trading In January-March Quarter – NDTV Profit
Leading commodity exchange MCX plans to launch options trading in the next quarter of this fiscal in a few commodities like bullion and crude oil following Sebi’s decision to allow such trading on bourses.

Nasdaq Nordic And Baltic Markets: Trading Statistics September 2016
Press Release
Nasdaq (Nasdaq:NDAQ) today publishes monthly trade statistics for the Nordic and Baltic markets. Below follows a summary of the statistics for September 2016.

****SD: “Derivatives trading decreased by 17.5% to a daily average of 420,884 contracts, compared with 510,104 contracts in September 2015.”

Dubai Gold and Commodities Exchange (DGCX) Volumes Surge 40%
Volumes on the Dubai Gold and Commodities Exchange (DGCX) touched close to 14.76 million contracts, growing 40% from same period last year. This year, the Exchange recorded an average volume of 75,148 contracts a day, valued at around USD 1.71 billion. The Exchange also capped the third quarter with over 5 million contracts, growing 26% from Q32015.

****SD: Yet again, the rupee options contract dominates.

Regulation & Enforcement

New SEC rules for securities clearing agencies may benefit EU banks
Joe Mont – Compliance Week
In response to a growing reliance on their services, the Securities and Exchange Commission has adopted rules that establish enhanced standards for the operation and governance of securities clearing agencies. The changes apply to entities that are either designated as systemically important or involved in complex transactions, such as security-based swaps.


FINCAD: Derivatives boom leading to tech investment
Asset Servicing Times
Financial institutions are increasing use of derivatives as an investment strategy and investing in technology in order to manage this change, according to a survey by FINCAD.

***JB: Here is FINCAD’s nifty infographic on this subject.

Distributed Derivatives Platform Velocity Offers Smart Contract Price Feeds
Avi Mizrahi – Finance Magnates
Startup distributed derivatives platform Velocity has announced a smart contract on price feeds. Using blockchain technology and Ethereum smart contracts, it is meant to make derivatives more transparent, accessible, and secure for the crypto assets community. The decentralized options platform allows users to enter into a collar option using a smart contract on the Ethereum blockchain, meaning it doesn’t rely on central servers or middlemen settlement processes to manage funds.


Oil Volatility: How To Trade OPEC, Venezuela & Nigeria
Dimitra DeFotis – Barron’s
The significance of last week’s pronouncement from OPEC may not push oil prices meaningfully higher, but what’s important is that the group’s members are once again actively trying to manage supply and prices.

Is Shorting UVXY, TVIX, Or VXX The Perfect Trade?
Vance Harwood – Investing.com
The charts for long volatility Exchange Traded Products (ETP) like Barclays’s VXX, VelocityShares’ TVIX, and PowerShares’ UVXY are astonishing. I’m not aware of any other widely available securities that have declined like these.

US elections and volatility
Chris Beauchamp – IG
As October gets underway in earnest, strategists are lining up to suggest that more volatility is on its way. To be fair, they do appear to have history on their side. Years containing presidential elections in the US do appear to see more volatility, with much of this concentrated in the month immediately preceding the event itself.

Pensions Caixa 30: Risk-reduction exercise
Investments & Pensions Europe
Pensions Caixa 30, the employees’ pension fund of the CaixaBank banking group, is Spain’s biggest corporate pension scheme, with EUR5.8bn of assets under management. It also has nearly 50,000 members and beneficiaries, with sizeable additions in recent years, as CaixaBank has acquired several other banks.

****SD: A pension that uses put options for its tail-risk strategies.

Weekend Review – VIX Options and Futures – 9/26 – 9/30
Russell Rhoads – CBOE Options Hub
The VIX curve did The Twist (cue Chuck Berry) as spot VIX rose 8% and the front month October contract was up by just over 1%. Beyond the front month all things were red.

Weekend Review – Volatility Indexes and ETPs – 9/26 – 9/30
Russell Rhoads – CBOE Options Hub
The VXST – VIX – VXV – VXMT Curve is a consistent way to look at different S&P 500 Option Implied Volatility time frames. All four indexes moved up a bit last week, with the curve shape maintaining a pretty steep shape.

Weekend Review – Russell 2000 Options and Volatility – 9/26 – 9/30
Russell Rhoads – CBOE Options Hub
For the first time in a while the Russell 1000 was higher while the Russell 2000 lost value last week. The numbers were slight with RUI up 0.15% and RUT down 0.26%. For the year RUT still maintains a nice lead with three months to go in 2016.

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