JLN Options: Energy Hedges Soar on Bets Stocks Will Follow Oil Lower; The Bull Market’s Strength Is Reaching Epic Proportions; Surging U.S. Stocks Echo Dot-Com Rally With Cheaper P/E

Aug 27, 2014

Lead Stories

Energy Hedges Soar on Bets Stocks Will Follow Oil Lower
Inyoung Hwang – Bloomberg
Investors are buying protection against losses after a 19 percent rally in U.S. energy shares, concerned they’re bound to fall amid depressed demand for oil.
Options on the Energy Select Sector SPDR Fund (XLE) have tripled in price since May relative to contracts on an exchange-traded fund tracking the Standard & Poor’s 500 Index, according to six-month data compiled by Bloomberg. The gap widened to 3.3 points on Aug. 14, the widest since January.

The Bull Market’s Strength Is Reaching Epic Proportions
Steven Russolillo – WSJ
With the S&P 500 topping 2000, it’s a perfect time to take stock of the current bull market, which is reaching rarefied air.
The S&P 500 has rallied 195% since March 2009, the fourth-best bull market since 1928 in terms of both duration and magnitude, according to Bespoke Investment Group.

Surging U.S. Stocks Echo Dot-Com Rally With Cheaper P/E
Lu Wang and Oliver Renick – Bloomberg
Every day, the American bull market looks more and more like the dot-com bubble of the late 1990s. Except when it comes to valuations.
The Standard & Poor’s 500 Index (SPX) closed above 2,000 today and the Nasdaq Composite Index is within 10 percent of a record reached in March 2000, a time when Pets.com Inc. was worth more than $150 million. Investors have seen annualized returns of 24.5 percent since March 2009, compared with 27.1 percent over an equal amount of days ending March 24, 2000, the peak of the Internet rally, according to data compiled by Bloomberg.

Divergent monetary policies ruffle flat calm in FX markets
Anirban Nag – Reuters
Months of dead calm in financial markets that have crushed trading volumes and hit bank profits may be drawing to a close as currency investors gear up for volatility triggered by monetary policy shifts in major economies.
Occasional convulsions due to war and other political risks notwithstanding, the volatility on which traders thrive and make money has all but evaporated this year.

Videocast: Low volume in VIX pits

Bull Moose Derivatives joins forces with Krechendo
Bull Moose Derivatives, a trading firm offering direct market access to London’s derivatives traders and managed futures accounts, has partnered with Paris-based trading arcade Krechendo Trading.


NYSE Promotes Arca Chief Adcock Amid Broader Management Changes
Sam Mamudi and Matthew Leising – Bloomberg
NYSE Group Inc. promoted Paul Adcock, who helped pioneer electronic equity trading in the 1990s, to oversee day-to-day operations of its U.S. stock exchanges, according to people familiar with the matter.
Adcock joined NYSE in 2006 when it bought Archipelago Holdings Inc., which was later turned into one of the company’s three equity markets, NYSE Arca. In the new position, he’ll oversee venues handling about 20 percent of U.S. stock trading, including the 222-year-old New York Stock Exchange.

Liffe Sets Daily Volume Record in Long Gilt and Ultra Long Gilt Futures, Long Gilt Futures Surpass 1,000,000 Daily Contract Mark
Press Release (Intercontinental Exchange)
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, announced today that daily volume records were reached in Liffe Long Gilt futures and Ultra Long Gilt futures with 1,042,074 contracts and 5,118 contracts traded respectively on August 26, 2014.
The prior daily volume record of 905,515 Long Gilt futures contracts was set on May 27, 2014; and Ultra Long Gilt futures reached a previous daily volume record on May 28, 2014 with 4,702 contracts traded.

Regulation and Enforcement

U.S. regulators to test wider trading increments for small caps
Herbert Lash – Reuters
U.S. security regulators filed a proposal on Tuesday to create a 12-month test period that will widen the minimum quote and trading increments for small-cap stocks that trade infrequently to see whether it will increase trading.
The program will include stocks with a price of at least $2 per share, have a market capitalization of $5 billion or less and average daily trading volume of one million shares or less, the Securities and Exchange Commission said in a statement.

Industry braces for tick size pilot
The Trade
The US Securities and Exchange Commission (SEC) is expected to release the details for the industry-developed minimum tick size pilot imminently, which will kick off industry preparation for the scheme.

CFTC fines Merrill Lynch $1.2 million for client fee errors
The U.S. futures regulator said on Tuesday it had fined a unit of Bank of America Corp $1.2 million for failures to supervise the processing of fees charged to its customers over a period of three years.


Don’t Layer Currency Risk On Top Of Equity Exposure
Jeremy Schwartz – NASDAQ
How many people think it is a smart idea to take their exposure to U.S. equities and layer on top of it-dollar for dollar-an additional exposure to the U.S. dollar? This type of layering additional risk might be called a form of leverage, as an investor would be providing two sources of return for a given dollar investment. For example, consider a $1 investment in a hypothetical fund that provides exposure to $1 of U.S. equities and $1 of exposure to the U.S. dollar ($2 of distinct asset class risk for every $1 invested). Few long-only investors in the U.S. desire this strategy, and I have rarely seen anything like this exposure offered to investors in the U.S.

Biggest Past One-Day Moves – VXST Up 81.8%; GVZ Up 61.7%
Matt Moran – CBOE Options Hub
Investors who explore volatility and diversification strategies often are looking for instruments that provide a lot of “bang-for-the-buck,” and they may ask – if most items in my portfolio are falling, are there any products with negative correlations that can experience sharp jumps in uncertain times?

Options Education

Buying and Selling Waves
Bob Lang – CBOE Options Hub
This market does not make life easy, does it? What we would all prefer is some predictability about the action and a few reliable patterns that show us exactly where markets are going (more on that later).
It seems impossible to establish a rhythm to our trading/investing. We are unable to find the flow as markets go up and down. We often find ourselves facing north when we should be looking south, and vice versa. Unfortunately, our time frame as traders is often not the time frame of the markets, and that inevitably leads to frustration and disappointment. The market will do its thing, and we have to be ready to move.

Expiration Friday – At Last
Marty Kearney – CBOE Options Hub
Expiration Friday.
Since the beginning of time (OK, the last 40 years we’ve had listed options), options expired on the Saturday following the 3rd Friday of the month.  Why Saturday?
Let’s take a walk to the way-back machine with Mr Peabody.   I was a floor trader at the CBOE and I am trading front-month options on the Friday of expiration.   My trading cards would have to be delivered to my clearing firm and key-punched (yes they were youngsters).



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