Observation and Insight


Steve Crutchfield, EVP at IntercontinentalExchange – How to Build an Options Trading System (In Ten Minutes)

“You’ve got to come up with some numbers that describe the universe based on data that fit that model.”

Steve Crutchfield, Executive Vice President at IntercontinentalExchange, explains the three key components of building a trading system. Beginning with a brief history of the New York Stock Exchange, Crutchfield gives a glimpse of trading activity in its early stages and its evolution into today’s intricate electronic systems. Crutchfield emphasizes that looking at historical data and determining which numbers to pull out from it is a difficult problem to solve, among many other challenges in the trading world today.

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Lead Stories

Fed Optimism Spurs Record Bets Against Stock Volatility
Inyoung Hwang – BloombergBusinessweek
A soft touch on monetary policy will continue to suppress stock volatility, or so suggests the record stretch of cash going into an exchange-traded note that rallies as calm returns to equities.
The Chicago Board Options Exchange Volatility Index, known as the VIX, has decreased 31 percent this month and investors are wagering on further declines. In the five weeks through Aug. 15, they put almost $320 million into the VelocityShares Daily Inverse VIX Short Term ETN (XIV:US) — the longest stretch of weekly investments since the note began trading in 2010.

New Study Shows Advisors’ Use of Options Increased 13% Since 2011
Press Release (OCC)
The Options Industry Council (OIC) announced today the results of a new benchmark study on financial advisors’ use of options conducted by Bellomy Research and commissioned by OIC. This is the second quantitative study that OIC has commissioned on advisors’ use of options following the inaugural study in 2011. The 2014 Benchmark Study found three out of five advisors have used options in the past 12 months, a 13 percent increase since the 2011 study. Advisors who were surveyed in the study anticipated their options use to grow 43 percent in the coming year. The new study also found that advisors are using options with more of their clients in 2014, and that options users are twice as likely to have larger, more successful businesses.

U.K. Natural Gas Options Trading Signals Ukraine Supply Concerns
Isis Almeida – Bloomberg
Options traders are bracing for higher European natural gas prices as the worsening conflict between Russia and Ukraine threatens to disrupt supplies of the fuel this winter.
Three of the four most-active natural gas options are calls giving the holder the right to buy U.K. gas futures in January, February and March at levels at least 20 percent above current prices, ICE Futures Europe data showed. The number of outstanding calls, known as open interest, for all months traded is the highest since ICE listed the contracts in 2011.

Volatility Remains Elevated Across Markets
Michael Sedacca – Minyanville’s Wall Street
I was going back and forth with a friend a few minutes ago trying to figure out why equity implied volatility – the VIX structure in particular – remains bid in the face of higher equities. We came to the following conclusion:

RBI again calls for deeper co-op among major central banks
The Asian Age
…It said these measures could minimise the snowballing of adverse feedback spill-overs of quantitative easing withdrawals taking the locus towards a globally optimal monetary policy framework. The report said RBI research work suggests a clear relationship between the US volatility index (Vix) and the volatility in various financial markets in emerging markets, including India. US Vix is a widely tracked measure of volatility in the US equity markets.

West Coast boutique crafts custom structured products
Yakob Peterseil – Risk.net
Since 2009, the firm Paoloni founded, IPS Strategic Capital, has been building and selling custom structured notes for family offices, high-net-worth individuals and financial advisers. Using exchange-traded options and baskets of corporate debt, IPS will build capital-protected and principal-at-risk notes on several popular underlyings for a flat fee of 1%. As the notes are built directly into clients’ accounts, notional amounts can be as low as $2,000.
Working with derivatives means Paoloni prefers to build structures on underlyings with deep, liquid options markets, and he is particularly fond of the S&P 500, because it has the most liquid in the world.

Equity derivatives house of the year: Credit Suisse
Yakob Peterseil – Risk.net
Having found great success with its algorithmic indexes and Japanese structured funds, Credit Suisse is Structured Products’ equity derivatives house of the year in the Asia-Pacific region
Credit Suisse has had great success turning clever ideas into billion-dollar products over the past 12 months. With no shortage of algorithmic strategies and institutional solutions being pitched by the region’s investment banks, Credit Suisse’s year serves as a stark reminder of a hard truth – as tough as it is coming up with innovation, the real test comes in convincing someone to invest in it.

Regulation and Enforcement

Why CFTC reauthorization matters
Congress has reauthorized the Commodity Futures Trading Commission seven times since its creation in 1974. While reauthorization has been the focus of past political debate, particularly the Commodity Futures Modernization Act of 2000, extending the CFTC’s governing laws has never been more important than right now.

Wall Street Plays Dangerous Derivatives Games — Again
John Morgan – Newsmax
The same kinds of complex, confusing derivatives that almost brought down the global financial system in 2008 are back in spades, according to the Financial Times. As one trader put it: “We’ve reformed nothing.”
The U.K. newspaper suggested investors may be fooled by a false sense of security, and are therefore “chasing levered returns via certain types of US credit derivatives that Wall Street is willingly providing in the current climate of low interest rates and moribund volatility.”

CFTC quietly amassing data on natural gas swaps
Alexander Osipovich – Risk.net
Numerous energy companies have received special calls from the CFTC in the past year, say lawyers, but the reasons for the agency’s interest remain murky.
Dozens of US energy companies have been quietly contacted by the Commodity Futures Trading Commission (CFTC) over the past 12 months and ordered to hand over information about their swap trading activities, primarily in natural gas, prompting surprise and confusion as they try to respond to the unexpected queries, say lawyers.

Options Education

Reader Mail: Dissecting the VIX Drift
Adam Warner – Schaeffer’s Investment Research
Time to open up the (not terribly) voluminous viewer mailbag and answer some questions, some of which actually have to do with options.



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