JLN Options: European investors seize on cheap options to bet on US debt deal

Oct 11, 2013

Lead Stories

European investors seize on cheap options to bet on US debt deal
Alistair Smout – Reuters
European investors are piling into cheap one-month option bets on a short-term U.S. debt deal, while loading up on protection for November in case the money runs out.

And There Went the VIX Rally…
Adam Warner – Schaeffer’s Investment Research
Remember that overbought CBOE Volatility Index (VIX) we talked about? You know, the one where the VIX closed 20% above its 10-day simple moving average (SMA) within the backdrop of a generally weak VIX?

VXST, VIX, VXV, and the Rest of the Curve
The Options Insider
Rises in VIX and implied volatility in general tend to attract the attention of business reporters and other market watchers who do not usually follow options markets all that closely. I’ve seen several mentions recently, for instance, of the ratio of VIX to VXV as an indication of market stress, and some readers have asked whether I planned to write about this ratio sometime soon.

Videocast: VIX is pricing in a deal

Risk Control: Nassim Taleb Versus Reality 
The Aleph Blog
Okay, Taleb has offered up six ideas for us to consider regarding risk control.  Here they are:

  • 1/n
  • Barbell – safe & risky
  • Positive optionality
  • Want a floor – no “fake low volatility”
  • Avoid leverage – operational & financial
  • Alignment of Interests


 As gold confusion persists, what’s the options market telling us?
Ole Hansen – TradingFloor.com
The widespread confusion about where to go next for gold has so far resulted in it being trapped within an ever-narrowing trading range currently at 1,277-1,325 USD/oz . Focus on Washington over the debt-ceiling negotiations, a stronger dollar, weaker US data and bond yields back on the rise have all been sending conflicting news to the market resulting in what has so far been a quiet month in terms of turnover on the major exchanges.

CME Group, futures regulator to part with struggling AlphaMetrix
Tom Polansek – Reuters
The parent company of a firm CME Group Inc and the National Futures Association hired to help launch a program to improve futures customer protections said on Thursday it had financial problems and was working to improve internal controls.


CBOE Confident It’s Made Its Point About How Great Longer VIX Hours Will Be Now 
Jon Shazar – Dealbreaker
The CBOE is extending VIX futures trading hours later this month, but not before curtailing them in the sort of unplanned, glitchy way we’ve come to know and love from our securities exchanges.

Nasdaq CEO Considers Testing Ground for Trading Software
Jacob Bunge – The Wall Street Journal
Exchanges should consider developing a central testing ground for new trading functions, the chief executive of Nasdaq OMX Group Inc. (NDAQ) said.

**They should have been doing this all along.  A testing environment is critical for systems this complex and this important. -JB


Exclusive: U.S. CFTC finishing new, tougher commodity limits rule – sources
Douwe Miedema – Reuters
The U.S. derivatives market regulator is nearing completion of a new rule for position limits in commodity markets that is in parts tougher than the previous proposal, two sources with direct knowledge of the plan said.

**Who’s finishing these things?  Aren’t they all furloughed?  -JB

CFTC’s O’Malia: Billions in Contracts Traded as Swap Platforms Ramp Up
Jacob Bunge – The Wall Street Journal
Hundreds of billions of dollars in swap contracts have traded across new U.S. platforms that opened for business last week, according to a senior derivatives-market regulator.

Options Education

VXX Calendar Spread: Embrace Time, Exploit Volatility
Tyler Craig – InvestorPlace
Owners of long-term options can enhance returns and generate a little income along the way by harnessing the power of the calendar spread. Here, we’ll discuss how to do so via the iPath S&P 500 VIX Short Term Futures ETN (VXX).

Why Supply & Demand?
Sam Evans – The Options Insider
In my nine years of studying the markets and actively trading, I have been introduced to and come across various techniques on how to enter and exit positions in the FX markets. Some of the strategies were complicated, others were far more technical and relied on a variety of different indicators to get the correct signal when to buy or sell.

The evaluation of American compound option prices under stochastic volatility and stochastic interest rates
Carl Chiarella and Boda Kang – Journal of Computational Finance (via Risk.net)
A compound option (the mother option) gives the holder the right, but not the obligation, to buy (long) or sell (short) the underlying option (the daughter option). In this paper, we consider the problem of pricing American-type compound options when the underlying dynamics follow Heston’s stochastic volatility and with stochastic interest rate driven by Cox-Ingersoll-Ross processes.

**Some light weekend reading. -JB


[Video] How to Play the VIX
Trading Advantage’s Scott Bauer discusses his options play for the VIX. He speaks on Bloomberg Television’s “Market Makers.”

How the smart money is playing the crisis
Lawrence Delevingne – CNBC
“Going into today we’re short volatility and long risk as our view was there was little chance this would ever amount to a default,” said the manager of a $1.5 billion macro hedge fund that is betting on the appreciation of stocks in the U.S., Europe and Japan.

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