Lead Stories

Fear Muted in Nasdaq Amid Biggest Swings in Two Years: Options
Joseph Ciolli and Callie Bost – BloombergBusinessweek
The fear gauge for technology stocks shows little panic among investors even after the Nasdaq 100 Index’s wildest swings in two years.
The Chicago Board Options Exchange’s measure of expectations for future volatility on the Nasdaq 100 fell 4.1 percent to 18.59 last week, the lowest level since 2012 compared with a gauge tracking the magnitude of recent share-price moves. That shows traders aren’t too worried that declines will dramatically worsen after stocks from Amazon (AMZN:US).com Inc. to Netflix Inc. slid more than 5 percent last week.

Former FOA chief takes board role at NLX
Anish Puaar – Financial News
Anthony Belchambers, an industry veteran who set up the FOA in 1993, and who left the organisation in March, takes the role of non-executive director at NLX.  Belchambers, a trained barrister, remains a special adviser to the FOA — now known as FIA Europe after a merger with the US-based Futures Industry Association was finalised last July.

VIX instruments experience vega spike
The changing sources of volatility demand has led to more vega being traded in VIX futures and VIX exchange-traded products over listed S&P 500 and SPDR S&P 500 ETF options. In a presentation on the shifting landscape of volatility products, Maneesh Deshpande, head of Americas equity derivatives strategy at Barclays, identifies the changing trends in volatility demands and the likely market outlook for the VIX and volatility products. Rob McGlinchey reports.

VIX success drives vol market forward
After more than 10 years since futures on the VIX began trading on the CBOE Futures Exchange, GlobalCapital Derivatives hosted a roundtable with senior buyside and exchange officials to look at how the exchange-traded and over-the-counter volatility markets have progressed in recent years. The topics of discussion included whether volatility has reached a point where it can be considered an asset class, implementation considerations for investors looking to allocate to volatility and persistent low liquidity in European and Asian volatility products.

Last Week in VIX – 4/27/2014
Russell Rhoads – VIX Views
VIX was 5% higher last week despite the S&P 500 being virtually unchanged for the week.   For the first four days last week VIX was pretty range bound.    When Friday rolled around and there were some concerns about being short volatility over the weekend VIX broke to the upside, but by 3:15 Chicago time was near the 14 level and actually came real close to falling back to having a 13 handle which was the handle for the majority of the week.

Swaps and derivatives: Tougher capital rules boost traders’ feelings of security
Philip Stafford – Financial Times
Last month the International Swaps and Derivatives Association (Isda), a trade body, asked members and swaps users if markets were safer now than before the financial crisis.
It was a good time to ask. Higher standards, brought in under Basel III banking capital requirements and legislation such as the US Dodd-Frank act and the European Market Infrastructure Regulation, have been debated in the past five years to the point where they are beyond the comprehension of many.

Large Speculators Raise Silver Net-Long Positions; Gold Activity Mixed – CFTC Data
Kitco News (via Forbes)
Large speculators bolstered their net-long silver futures and options positions on the Comex division of the New York Mercantile Exchange in the latest weekly commitments of traders report from the Commodity Futures Trading Commission, reversing recent reductions.

VIX Futures Market Speculators cut down on bearish positions last week
Large traders and speculators decreased their overall bearish bets in the VIX futures market last week after four consecutive weeks of rising bearish positions, according to the latest data from the Commodity Futures Trading Commission (CFTC) released on Friday.

Churn Baby Churn …
Why the market could be range-bound for the next few months
Adam Warner – Schaeffer’s Investment Research
I’d like to go back in time and make a 2014 New Year’s resolution to sell S&P 500 Index (SPX) or SPDR S&P 500 ETF Trust (SPY) strangles, ignore the day-to-day noise, and just roll the strangles every two to three weeks or so.
Net-net, Big Cap just continues to go absolutely nowhere. SPY ended the week of April 17 at $186.39 and closed Friday at … $186.29! It rallied nicely Tuesday, then gave it all back on Friday.

Eurodollar spreads get interesting
Greg Adamsick – Futures
Heading into this week’s Federal Open Markets Committee (FOMC) meeting that’s scheduled for April 29-30, economic data has been showing a pick-up in activity and corporate earnings have been coming in better than expected; with the spring thaw looking to release pent-up demand as expected. While these are good developments, this likely will keep the Fed on its current course of tapering, prompting a further $10 billion reduction in bond purchases at each forthcoming meeting.

Russell survey finds institutional investor smart beta adoption, drivers underpin latest step in evolution of investment management
Press Release (Russell Investments)
Asset owners may debate what to call alternatively weighted or factor-based indexes, but adoption among the largest institutional investors is clearly strong, growing and broad-based according to Russell Investments. A new Russell institutional market survey, entitled Smart Beta: A Deeper Look at Asset Owner Perceptions, confirms that asset owners in North America and Europe are actively using smart beta indexes in strategic and tactical ways to pursue a variety of investment outcomes.


OCC Successfully Launches Clearing OTC S&P 500 Equity Index Options On April 25
Press Release (OCC)
 OCC announced today it launched its over-the-counter (OTC) S&P 500 equity index option clearing services on Friday, April 25, bringing capital and operational efficiencies and enhanced customer protections to the OTC equity derivatives marketplace.
“We are very pleased to be the first clearing house in the U.S. to clear OTC equity index options and bring the strength of OCC’s systems and risk management to this marketplace,” said Craig Donohue, Executive Chairman of OCC.

NYSE Arca and NYSE MKT Announce Trading and Liquidity Enhancements for ETPs
Press Release (NYSE)
NYSE Arca and NYSE MKT today announced a set of enhancements designed to increase liquidity and market quality in Exchange Traded Products (ETPs), while advancing the listing and trading experience of the ETP community. Each of the initiatives is pursuant to rules filed with the U.S. Securities and Exchange Commission (SEC).
On May 5, 2014, NYSE MKT will begin trading certain ETPs listed on other markets, including NYSE Arca, through the Unlisted Trading Privileges (UTP) program, creating a substantial new liquidity pool supported by NYSE MKT Designated Market Makers (DMMs).

Are exchanges and brokerage houses the new deep pocket targets?
Danel P. Collins – Futures
Some end users do not like the way electronic trading has evolved but only partially blame this on high frequency trading. The use of devices like “iceberg orders” make it difficult to see what the actual size is in the market. Some old-time traders prefer the certainty of being able to get off size even if it means giving up the edge.
The most troublesome aspect of Michael Lewis’ book “Flash Boys: A Wall Street Revolt,” is it oversimplifies a complex subject and grossly mischaracterizes the players. Lewis continues to go on interview shows and claim that there is “scalping” going on as if it is some kind of a crime.
***JB: When the government was chasing down the tobacco companies for big paydays I warned (to anyone who would listen which was admittedly not many…maybe just my dog) that this set a very bad precedent.  But it was the tobacco companies so they garnered little sympathy and there was a, “they’ve got it coming” mentality.  Will history repeat itself?

First stage of Eurex-Taifex cross-listing project to go live in May
Xiao Wang – Risk Magazine
Co-operation is the key word for Asian exchanges as they seek to expand market share and develop index liquidity and May 15 will see a further extension of this trend with the trading of a joint Eurex and Taiwan Futures Exchange (Taifex) product. The cross-listing is the first stage of an arrangement that will enable futures and options linked to Taiwan’s benchmark Taiex stock index to be tradable on the Frankfurt-based exchange. The move aims to provide an overnight market for investors to hedge their Taifex positions after the Taiwan market shuts in the early afternoon.

Madras Stock Exchange to shut shop after 76 years
Rajesh Chandramouli – The Times of India
South India’s fountainhead equity trading house, the 76-year-old Madras Stock Exchange will cease to exist from May 30 after it failed to adhere to several new regulatory requirements, including increased net worth as outlined by markets regulator Sebi. The shutdown appears imminent unless there is a dramatic change in rules over the next couple of weeks.

Regulation and Enforcement

Ex-Barclays New York Traders Charged in Libor-Rigging Probe
Suzi Ring – BloombergBusinessweek
Three former Barclays Plc (BARC) derivatives traders in New York were charged by U.K. prosecutors with manipulating Libor, becoming the first U.S.-based bankers to be accused in the British probe.
Ryan Reich, Alex Pabon and Jay Merchant were charged with conspiracy to defraud, the Serious Fraud Office said in an e-mailed statement today.


Volant Trading Announces VOLEX With Advanced Options Routing Capabilities Available Through REDIPlus EMS
Press Release (via GlobeNewswire)
Volant Trading expands execution services for options traders with advanced order routing capabilities and availability through the REDIPlus Execution Management System.


Trade of the Day: iShares Russell 2000 (IWM)
Even in this Charlie Brown market, there are opportunities to profit via index options
Jon Markman – InvestorPlace
This year reminds me of that classic set of “Peanuts” comic strips in which Lucy is always pulling the football away from Charlie Brown as he runs up to kick it. She promises each time not to yank the ball away, but every time Charlie Brown somehow ends up on his back anyway, with a sigh.
This year, every time the major indexes get back above par for 2014, it seems like the market gods are pulling the same trick.

Options Education

Considerations in volatility trading
Scott Maidel, senior portfolio manager at Russell Investments (via GlobalCapital)
Why does a volatility risk premium exist and persist?
Historically, implied volatility exceeds its ex-post realised volatility more than 80% of the time, meaning that option buyers typically pay too much. In general, investors are risk-averse, and they will pay more than is “fair” for the insurance that an option (or a volatility exposure) provides by buying the downside economic risk. There is a similar dynamic in the matter of why insurance companies are profitable: they receive more in insurance premiums than they are required to pay in claims.



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