Observations and Insight

Profiles: Lee Stern

Lee Stern has seen it all in his career – the highs of great markets and the lows of market scandal. After completing his military service in 1947, Stern found his way to the Chicago Board of Trade after answering an ad for a runner on the floor. Stern recalls the thrill of making his first spread trade and the low point in 1992, when a customer schemed to manipulate the bond market and lost $9 million. That event led to a brief suspension and its eventual exit as a clearing member firm.

And if trading was his first love, his second is certainly professional sports – as the founder and owner of the Chicago Sting soccer team and then as a part owner of the Chicago White Sox. John Lothian News presents the story of a career that has spanned more than six decades – and counting.

Watch the video »

Lead Stories

Fear gauge jumps 25% as Dow dips 250 points
Adam Shell – USA Today
Investor fear, long dormant amid a market melt-up this year, is coming out of hibernation. You can blame the Dow Jones industrial average’s 250-plus point tumble today for the sharp rise in investor angst.

Alibaba Options Give Investors a New ‘First Chance’
Steven M. Sears – Barron’s
If you missed out on the Alibaba IPO, fret not. Options are scheduled to begin trading on Sept. 29, enabling investors to get a piece of the year’s hottest initial public offering
Alibaba Group’s (ticker: BABA ) puts and calls should instantly rank among the most volatile in the options market. One dealer says the options could be priced with an implied volatility of 50% to 60%, maybe even higher, indicating the stock is expected to move 3.12% to 3.75% each day.

Emerging-Market Bulls Bet Against Fed Shock on Equities
Namitha Jagadeesh – Bloomberg
Options traders are less pessimistic than equity investors about what will happen in developing countries as the U.S. Federal Reserve ends stimulus.
The cost of hedging against swings in an exchange-traded fund tracking the MSCI Emerging Markets Index is near a 13-month low compared with similar bets on the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. Hedging prices fell even as the developing-nation gauge slumped 5.3 percent since Sept. 3 and clients pulled more than $830 million from the iShares MSCI Emerging Markets ETF last week.

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‘Bendgate’ boosts Apple implied volatility
Andrew Wilkinson – Futures Magazine
Implied volatility is jumping on shares in Apple on Thursday as its shares fall alongside the broader market.
But Apple also has its own homegrown uncertainty thanks to the revelation of bendable iPhones and the hiccup in its latest iOS 8.0.1 software update. Apple is contributing 17-points of the Nasdaq composite’s 70-point decline this morning. At the launch of its iPhone 6 and 6+ shares in Apple reached as low as $97.75, enough to drive implied volatility on its options to 28.4%.

Market mauled by Fed hawk, Russian bear
Bob Pisani – CNBC
A number of factors appear to be moving markets around on Thursday. In addition to the usual rumors of a “large seller” hitting the sell button, there are at least two developments that are getting a lot of attention:

Volatile times return – but for how long?
Andrew Wilkinson – Interactive Brokers
The sudden slide for stocks on Thursday reminds us just how absent volatility has been during the rally that drove market indices to record highs. The 1.26% slide for the S&P 500 index is the sixth largest drop during 2014 and has lifted the CBOE Vix index to 16.22.

Market Volatility Explodes On Thursday. What Does That Mean For Friday?
Michael Comeau – Minyanville’s Wall Street
In my last post I mentioned today’s 30% pop in the CBOE Short-term Volatility Index (VXST).
VXST was launched in January 2011 and is essentially the VIX’ crazy cousin.
The VIX is based on expectations of 30-day future volatility, while the VXST is based on 9-day volatility, meaning it is far more sensitive to near-term market movements.

September solid month for options volume
Andrew Wilkinson – Futures Magazine
September is shaping up to be a solid month for options volume with the metric higher by 9.7% compared to the same time one month ago.
According to the OCC, total index and equity options volumes have run at an average pace of 17.65 million contracts per day through September 23. Such an average is the strongest pace since February when daily volumes averaged 18.45 million contracts.

Shorting Alibaba Costs 7% to Borrow Shares After IPO
Oliver Renick – Bloomberg
Convinced Alibaba Group Holding Ltd. (BABA) is doomed to fall after the world’s biggest initial public offering? Now you can make that bet in the stock market.
Share transactions from the China e-commerce company’s first day of trading on Sept. 19 have been completed after a three-day settlement period and brokers are making them available for loans. That’s the first step in a short sale, where a bearish trader borrows a stock and sells it, hoping to profit by replacing it at a lower price.

Does a Small-Cap Death Cross Portend Big-Cap Weakness?
Adam Warner – Schaeffer’s Investment Research
A recent death cross for the Russell 2000 Index (RUT) sparked some fear in the market

VIX ETFs Capitalize on Increased Market Concerns
Max Chen – ETF Trends
The CBOE Volatility Index, or “VIX,” related exchange traded funds surged Thursday as the equities market declined the most in eight weeks, weakening on the sell-off in Apple (NasdaqGS: AAPL) and another turn in the Russia drama.
The iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), a VIX-related exchange traded note, dropped 6.8% Thursday while the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) decreased 6.6%.

Analysis: Australian Binary Options Industry Looking for Quality Rather Than Quantity
George Tchetvertakov – Forex Magnates
Binary options burst onto the financial scene around the same time as the global financial crisis was wreaking havoc on all asset classes in 2008.
Binaries allow traders to speculate on the outcome of markets in a much more simplified way compared to traditional trading. The added simplicity combined with inflated returns and fueled by ultra-volatile markets set the scene for binary options to claim a sizable chunk of the retail trading industry albeit under a cloud of controversy.


CME Group Faces Stiff Competition, Growth Likely to Suffer – September 24, 2014
On Sep 23, we issued an updated research report on CME Group Inc. (CME – Analyst Report). The company’s modest capital position and diverse derivative-product line are being adversely affected by intense competition. Moreover, higher infrastructure costs and regulatory compliances, interest rate volatility, pricing pressure and higher tax rate pose operational and financial risks.

Regulation and Enforcement

FIA Global CCP Rulebook Review Will Provide Comprehensive Guide to Clearinghouse Rules
Press Release (FIA)
Today, FIA Global, in cooperation with the law firms Linklaters and Milbank, Tweed, Hadley & McCloy, announced a new guide to the rules of central clearing counterparties (CCPs). The FIA Global CCP Rulebook Review is a subscription service that will provide a standardized, comprehensive overview and analysis of the rules and procedures governing certain CCPs, as well as timely updates on changes to the rules and regulatory framework. It will highlight the issues most relevant to clearing members and end-users as they evaluate evolving regulatory obligations relating to CCPs on a real-time basis.
http://jlne.ws/YdrDsb (PDF)

U.S., Europe Hit Impasse Over Rules on Derivatives
Andrew Ackerman, Katy Burne and Viktoria Dendrinou – WSJ
U.S. and European policy makers have hit a snag in their postcrisis efforts to coordinate on international rules for derivatives, which played a central role in the 2008 meltdown.
The two sides are at loggerheads over the regulation of clearinghouses—entities that are supposed to help prevent a market-wide collapse by ensuring either party in a derivatives transaction would get paid if the other side falters.

Trillions saved as swaps margining standards agreed
Christopher Whittall – IFRAsia
The derivatives industry has taken a major step towards harmonising margining standards across the market, in a move that will slash the amount of high-grade collateral needed to be held against uncleared swaps under beefed up regulatory standards by trillions of dollars.


Trading Technologies Named “Trading System of the Year, Buy-Side” at FOW Asia Awards
Press Release (Trading Technologies)
Trading Technologies International, Inc. (TT), a provider of high-performance professional trading software, was awarded “Trading System of the Year, Buy-Side” by FOW magazine at the FOW Asia Awards today in Singapore. This marks the third consecutive FOW Asia Award for TT, after winning “Best New Product, Connectivity” last year and “Professional Traders ISV of the Year” in 2012.

Options Upgrades Its Trading Platform, Bolstering European Offering
Jeff Patterson – Forex Magnates
Private financial cloud provider Options has expanded its European offering, culminating in direct access to including CEF Eurex Ultra, Borsa Italia, and Spanish (BME) equities and derivatives, according to an Options statement.


Trading Alibaba (BABA) Options: What You Need to Know.
Fox Business
Alibaba options are slated to begin trading on Monday, September 29th.  Trading both puts and calls on BABA will be tricky at first. Expect wide bid-ask spreads on the option contracts until market makers have done some price discovery. What does that mean, exactly? The market makers’ hardest job with IPO option contracts is getting the implied volatility (IV) number correct for each expiration available. This is because there’s very little historical stock price data to go on.

New White Paper Discusses Leveraged BuyWrite Approach
Russell Rhoads – CBOE Options Hub
Over the summer I teamed up with Mark Sebastian from Option Pit and Hannah Chody, the Options Institute summer intern, to conduct a study on applying leverage to systematic buywrite strategies. The result was a white paper titled – A Leveraged Portfolio Management Approach Applying the CBOE S&P 500 2% OTM BuyWrite Index.

Options Education

The Options Industry Council Announces Investor Education Day in the Chicagoland Area October 11
Press Release (OIC)
The Options Industry Council (OIC) today announced that its third Investor Education Day (IED) for 2014 is taking place in Rosemont, IL on October 11.
Options are an ideal tool for a variety of investors and market conditions. The popular, and free, all day options education program is taught by experienced instructors from the various options exchanges and OIC professionals. This event is the first of two IED’s hosted by OIC this fall to help investors develop their knowledge and ability to responsibly trade options.

How To Buy Oil Options
Elvin Mirzayev – Investopedia
Crude oil options are the most widely traded energy derivative in the New York Mercantile Exchange (NYMEX), one of the largest derivative product markets in the world. The underlying of these options is not actually crude oil itself, but crude oil futures contracts. Thus, despite their names, crude oil options are, in fact, options on futures.



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