JLN Options: Dow Closes Above 16000; Goldman’s Currency-Trading Revenue Fell on Options Bet, WSJ Says; Could we see a single-digit closing value for the VIX Index soon?

Nov 21, 2013

Lead Stories

Dow Closes Above 16000
Matt Jarzemsky, Tomi Kilgore and Kaitlyn Kiernan – The Wall Street Journal
The Dow Jones Industrial Average closed above 16000 for the first time Thursday, extending a rally that has the blue chip-index on pace for its best year in a decade.

Goldman’s Currency-Trading Revenue Fell on Options Bet, WSJ Says
Michael J. Moore – Bloomberg
Goldman Sachs Group Inc. (GS)’s revenue from its currency-trading unit slumped during the third quarter after a wrong-way bet in the foreign-exchange market, the Wall Street Journal reported.

Sometimes Goldman Loses Money
Matt Levine – Bloomberg
The first thing to notice about today’s story on Goldman Sachs losing a billion dollars in currency trading is that it is two different stories. The Wall Street Journal tells us that “a complex options trade tied to the U.S. dollar and Japanese yen had contributed to the decline,” while Reuters thinks that “Goldman’s currency-trading problems came from the way the bank had positioned itself in emerging markets,” which do not as far as I know include Japan. There’s nothing necessarily inconsistent about that — there are lots of ways to get to losing a billion dollars in a quarter, and most of them involve multiple bad trades.

Could we see a single-digit closing value for the VIX Index soon?
Michael McCarty – CBOE
While many in the market are probably not even aware that the VIX Index has closed below $10.00, the measure of the market’s expectation for 30-day implied volatility for the underlying SPX Index has dipped below the $10.00 on nine occasions or 0.15% since January 1990 when VIX Index data is easily available.

The Biggest Loser in the VIX Expiration Games
Adam Warner – Schaeffer’s Investment Research
Welcome to VIX Expiration Games, November 2013 Edition. I’m going to go with the subtitle similar to yesterday’s thoughts on Bitcoin, or, “Perfectly legal ways to risk money that are exponentially more dangerous than betting on a football game.”

Emerging markets: Volatility is part opportunity and part trap
Robin Wigglesworth – Financial Times
The US Federal Reserve triggered a storm in developing countries this year when it announced plans to scale back its monetary stimulus. The market reaction was quick, violent and indiscriminate.

Videocast: December VIX protection

FX REPORT: Brokers Take Steps to Combat HFT
Mary Schroeder – Traders Magazine
While not 100 percent certain his problems come from high-frequency trading, Mike O’Brien is suspicious.
Eaton Vance, the Boston-based investment management firm where O’Brien is head of global trading, started using foreign-exchange algos four or five years ago. At the time, Credit Suisse’s AES platform was the dominant player. “They have a very good product and well-designed algos,” O’Brien said. However, he’s not as happy with FX algos as he once was.

Exchanges and Clearinghouses

CCPs face $161 billion liquidity shortfall to clear FX options, GFXD finds
Joel Clark – Risk Magazine
 Results of an industry study reveal the scale of the liquidity burden that would fall on CCPs clearing physically delivered forex options – but a net settlement mechanism could reduce the number by 73%

BSE to commence currency derivatives segment in early December 2013
Mumbai: The Bombay Stock Exchange (BSE) on Thursday said it proposes to commence trading in currency derivatives in early December.
Futures trading will commence on the dollar-rupee, euro-rupee, pound-rupee and yen-rupee pairs. Options trading will commence on dollar-rupee contract.

Regulation and Enforcement

Powell Says Regulators Fixing Big Flaws in Derivatives Market
Caroline Salas Gage – Bloomberg
Federal Reserve Governor Jerome Powell said regulators are attempting to fix the “significant flaws” in the over-the-counter derivatives market that were revealed by the financial crisis.

CFTC’s Challenge to Binary Options
James Bibbings and Nicole Kuchera – Opalesque
“In its complaint, the CFTC contends it has jurisdiction over binary options trading because binary options are effectively options on commodity contracts regulated by the CFTC.”

‘Volcker Rule’ faces new hiccups
Bernie Becker – The Hill
Gary Gensler, the chairman of the Commodity Futures Trading Commission, and Kara Stein, a new Democrat at the Securities and Exchange Commission, both essentially believe the rule currently is not strong enough, according to The Wall Street Journal.
**So Lew is optimistic it will be done by year end and Gensler isn’t.  -JB

CFTC unveils new weekly swaps report
The U.S. Commodity Futures Trading Commission (CFTC) unveiled its new weekly swaps report on Wednesday, as part of a series of mandates to reign in the multitrillion-dollar derivatives market.

CFTC/SEC Identity Theft Policies Now Required
James Bibbings and Nicole Kuchera – Dan Collins Report
As a reminder, on May 20, 2013, the Commodity Futures Trading Commission (CFTC) and U.S. Securities and Exchange Commission’s (SEC) joint final rules concerning identity theft precautions took effect.  Most regulated firms will be required to comply with the final rules by November 20, 2013.  In particular, the final rules require that certain regulated entities establish programs to address and reduce the risk of identity theft within their operations.

Where Does JPMorgan’s $13 Billion Go?
Ben Protess and Jessica Silver-Greenberg
They were some of the biggest losers in the 2008 financial crisis: Fannie Mae and Freddie Mac, federal taxpayers, state pension funds, credit unions and, of course, homeowners.
But their fortunes turned somewhat on Tuesday, when they ended up on the receiving end of JPMorgan Chase’s record $13 billion settlement.


To Lock in Market Gains
Steven M. Sears – Barron’s
A risk-reducing strategy for a market in which stocks are getting more and more expensive while options are cheap.


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