Lead Stories

Euro’s Rebound Backed by Biggest Turnaround in Options Since ’03
Bloomberg
Options traders are betting that the euro will stay resilient in the coming weeks amid the biggest turnaround for the currency in at least 12 years.
The relative cost of protecting against a euro decline versus the U.S. currency has fallen 1.66 percentage points in July, set for its biggest monthly drop, according to data on one-month risk reversals going back to October 2003.
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Will Option Traders ‘Pin’ Gold to $1,100/oz?
Tatyana Shumsky – WSJ
Gold is trading surprisingly close to $1,100/oz and some say option traders are behind the move higher.
A large number of options contracts that protect holders against a price drop below $1,125 and $1,100 are set to expire at close of business Tuesday. If futures prices trade below $1,100, for example, holders of that option contract will receive bullish futures contracts allowing them to sell gold for $1,100 on Tuesday night. But if prices are higher, the option expires worthless.
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***DA: The term structure is pretty flat at $1100 for the next year and beyond. We may be asking this question again in Sep, Oct, Dec, Feb, Apr, Jun, etc.

Speculators show global commodities rout still has legs
Veronica Brown and Pratima Desai – Reuters
Speculators have confirmed what everyone else has been thinking: expect more falls in commodities, as worries about China and higher interest rates combine with waning sentiment to suggest markets are heading further south.
But while more losses are certain, their scope could be limited because a large number of speculators have already made bets that prices will fall.
Commodities from iron ore, to oil, grains and gold have shed value as the current extended price boom, or “super-cycle”, wanes.
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***DA: Or not.

China Stock Rout Drives Cost to Bet on ETF Drop to Record High
Belinda Cao and Ye Xie – Bloomberg
If U.S. investors thought it was difficult to make money from the boom in China’s stock market, they’re probably finding it even tougher to try to profit from a bust.
At the current cost to borrow shares of the biggest U.S. exchange-traded fund investing in mainland stocks, short sellers need the equivalent of a 40 percent annualized drop just to break even, according to Markit, a London-based research firm. The 28 percent plunge in the Shanghai Composite Index from its bull market high and volatility at the highest level in 18 years have made it more expensive than ever to profit from declines in the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF as investors push bets against the fund to near a record.
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***DA: Still plenty of room to the downside just to get to valuation levels of a year ago.

Betting It Can’t Get Any Worse for German Automaker Stocks
Inyoung Hwang and Roxana Zega – Bloomberg
Shares of Europe’s carmakers bore the brunt of selling when the Greek crisis raged and have been left behind by the ensuing recovery. In the options market, traders are taking a chance that the story has a happy ending.
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***DA: On the one hand, keeping the weak links in the eurozone makes German exports competitive, but on the other hand, global malaise is not good for automakers.

China a Focal Point as Fed Begins Policy Meeting
Kristen Scholer – WSJ
Investors increasingly are convinced that the Federal Reserve will hold off on raising rates until 2016 as the tumult overseas has intensified in the last month.
Wednesday they’ll see if the Fed offers clues as to whether they are correct.
The central bank begins a two-day policy meeting Tuesday and will release its statement on interest rates at 2 p.m. EDT Wednesday. The meeting comes as volatility has returned to China’s stock market after three weeks of relative calm.
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Global stocks shrug off China volatility
Dave Shellock – Financial Times
World equity markets managed to brush aside renewed volatility for Chinese stocks as the mood was lifted by generally well received corporate results and a burst of bid and merger activity in Europe.
But the recent slide in oil prices remained a worry for some as Brent crude touched a near six-month low before rallying.
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Markets Feel Normal Again (Maybe)
Bob Lang – CBOE Options Hub
Though we had four down sessions this past week and drop of 2% for the SPX 500, the action had a more normal feel to it. What am I talking about? First and foremost, it was nice for a change the market sentiment was not being driven by Greece. Since mid-June that has been the case, the unpredictability over a resolution has gripped investors/traders in a panic. When payment deadlines for Greece passed it was all but assumed the worst would happen and volatility shot through the roof in a short period of time.
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Options volatility fails to match gold selloff intensity
Dalton Barker – Bullion Desk
Last week as gold prices sustained a brutal selloff, volatility in the options market failed to respond leading Erik Norland, senior economist at CME group, to believe prices could still head lower.
“It would not surprise me to see prices below $1,000 [per ounce] in 6 or 12 months,” said Norland, who suggested that investors became complacent during the past several months of sideway price movements.
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Deutsche Bank Said to Hire Delaville as London CDS Index Trader
Alastair Marsh – Bloomberg
Deutsche Bank AG hired Basile Delaville to trade credit-default swap indexes in London, according to three people familiar with the matter.
Delaville previously traded index options at Bank of America Corp., said the people, who asked not to be identified because they’re not authorized to talk about the appointment. He began working at the lender in 2008, before which he worked at Credit Agricole SA, according to his registration with the U.K.’s Financial Conduct Authority.
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Exchanges

Bloomberg becomes regulated trading venue in Europe
Financial Times
Bloomberg is set to fall under the same trading platform regulations as its rivals after the UK markets watchdog approved the fixed-income venue’s application to upgrade its legal status.
The US group, one of the world’s largest electronic credit trading venues, will come into line with interdealer brokers like ICAP and Tullett Prebon as it competes in the over-the-counter derivatives market ahead of new European rules due in 2017.
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Deutsche Boerse CEO says currently has no plans to sell ISE
Arno Schuetze – Reuters
Deutsche Boerse currently has no plans to sell its U.S. derivatives exchange ISE, Chief Executive Carsten Kengeter said in an analyst call on second-quarter earnings.
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Deutsche Boerse buys three companies, raises guidance
Arno Schuetze – Reuters
Deutsche Boerse raised its earnings outlook after acquiring three companies over the weekend in a sign that the stock market operator is going back to takeover deals in its fight for global market share.
Deutsche Boerse said on Monday it would now seek to raise net earnings by 10 to 15 percent annually and revenue by 5 to 10 percent annually in the medium term.
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CBOE and C2 Postpone Listing of Options on Shake Shack, Inc. (SHAK)
Press Release – CBOE
CBOE Holdings, Inc. (NASDAQ: CBOE) announced that the Chicago Board Options Exchange (CBOE) and C2 Options Exchange (C2) are postponing listing options on Shake Shack, Inc. (ticker symbol: SHAK).
The delay in listing the options is the result of a pre-cautionary measure taken by the exchanges. Specifically, the exchanges expect that one of the listing criteria will become eligible once a secondary offering of the underlying stock is effective. The exchanges will issue a formal notice of the new listing date. This updates yesterday’s announcement which said SHAK options would begin trading on Tuesday, July 28.
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CME’s Q2 Performance To Be Driven By High Trade Volumes
Trefis
CME Group (NASDAQ:CME) is scheduled to announce its Q2 earnings on Thursday, July 30. The global exchange operator has witnessed a 6% year-over-year rise in trading volumes in Q2 to 13.3 million contracts traded per day. Growth was largely driven by trading of energy derivatives, agricultural commodities and foreign exchange futures and options. On the other hand, trade volumes of interest rate, metals and equities derivatives remained unimpressive through the quarter.
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Regulation & Enforcement

CME Group’s Terry Duffy to Appear before the U.S. House Committee on Agriculture to Discuss the Dodd-Frank Act’s Five Year Anniversary
Press Release – CME Group
CME Group Executive Chairman and President Terry Duffy will appear before the U.S. House Committee on Agriculture on Wednesday, July 29, to assess the progress of global derivatives reform.
“The Dodd-Frank Act ensured that certain swaps are traded on exchange and cleared through central clearinghouses, which represents progress toward the goals of the G20 of strengthening the financial system through increased transparency and reduced systemic risk,” said Duffy.
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Strategy

China Bloodbath Offers Investors Chance to Profit
Steven M. Sears – Barron’s
Investors who are worried that China’s stock market woes will worsen can buy bearish put options on the Deutsche X-Trackers Harvest CSI 300 Index ETF to hedge against declines.
The recommendation follows the recent 8.5% decline on the Shanghai Composite Index. The decline was the worst since February 2007. Some attributed the weakness to fears China’s government might reduce its support of the troubled equity market. Sentiment is so dour that a major bank strategist likened China’s market to America’s 1929 stock market crash.
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Hitting a single in $SVXY by Meredith Kelley Zidek
Meredith Kelley Zidek – CBOE Options Hub
Sometimes it isn’t the biggest trade that brings the most joy. Very late Friday afternoon, a casual idea got real so quickly that I rushed to construct an order with only minutes until market close. Checking the time as I worked, there appeared to be mere seconds left, but I submitted it anyway. The result is a trade that turned into an instant money-maker that grew to all but 15% of its potential value less than one full trading day after the crazy wish-making order was incredibly filled.
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What to Make of the Cheapest ‘Overbought’ VIX in Years
Adam Warner – Schaeffer’s Investment Research
As we just noted, the CBOE Volatility Index (VIX) is cheap in absolute value. But there’s another side to that coin.
Yes, VIX is high vs. itself. By “itself,” I mean its 10-day simple moving average (SMA). VIX closed about 25% above its 10-day SMA, and we all know what that means: more tables! Or at least the same table, only updated.
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Education

Options Strategy: Swing Trading With Variable Weighting
Michael Thomsett – CBOE Options Hub
Using options to focus more on either uptrend or downtrend is an effective method for augmenting the swing itself. The strategy assumes that you have an opinion about the prevailing direction of movement in the underlying, and that momentum confirms your opinion. So as a starting point, you can coordinate a weighting decision by checking some of the best momentum oscillators like RSI or MACD.
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