JLN Options: Finally, a Deal! But Not Before Shutdown Spooks Investors; Fear of Missing Out Hits Volatility Index

Oct 16, 2013

Lead Stories

Finally, a Deal! But Not Before Shutdown Spooks Investors
Steven Russolillo – The Wall Street Journal
Senate leaders have finally reached a bipartisan deal, but not before the wrangling in Washington thoroughly spooked stock investors…
More than $13 billion were pulled from U.S. stock funds over the past three weeks.
**And of course they are merely kicking the can down the road and we will be back at this in three months (assuming the House passes the Senate’s bill which seems likely).  It is a dangerous game of brinksmanship running to the edge and stopping just short.  Some day they might slip and go over. -JB

Fear of Missing Out Hits Volatility Index
Kaitlyn Kiernan – The Wall Street Journal
There is a new fear in the market: the fear of missing out.
The Chicago Board Options Exchange’s Volatility Index dropped nearly 20% on Wednesday, as Senate leaders announced a deal to reopen the government and avoid a potential U.S. government default.

Wall St soars on US Senate debt deal
The New Zealand Herald
In afternoon trading in New York, the Dow Jones Industrial Average climbed 1.19 per cent, the Standard & Poor’s 500 Index increased 1.23 per cent and the Nasdaq Composite Index added 1.13 per cent…
The Chicago Board Options Exchange Volatility Index, Wall Street’s so-called fear gauge also known as the VIX, plunged 19.5 per cent to 15.02.
**Numbers as of approximately 2:30p EST. -JB

Beating the Market: Yes, it can be done
The Economist
For nearly 40 years economists have preached that investors can earn above-average returns only by taking extra risks or by striking lucky. Recent evidence suggests that clever investors can outwit the market after all.

The Volatility Curve and a Black Swan Story
Russell Rhoads – CBOE
I go on vacation for two days and believe the government was going to have everything worked out when I returned.  It appears things are still uncertain and the introduction of the Short-term VIX (VXST – 23.54) has proven to be very timely.  Although introducing a new volatility index in early October is usually a pretty timely idea.

High Frequency Trading Increases Investors’ Costs: Study
Brendan Conway – Barron’s
The subject of high-frequency trading is drawing more attention from academic researchers, which is a good thing — ideally it’ll shed light on a subject that already generates a lot of heat.
The latest effort concludes HFT is a drag on institutional investors, and not a source of liquidity, as is often claimed.


BATS Chi-X Europe Launches Suite of Pan-European Trade Reporting Services
Press Release (BATS)
BATS Chi-X Europe, a pan-European Recognised Investment Exchange, today announced the rollout of BXTR, a suite of on-and-off Exchange Trade Reporting Services, which offers the pan-European trading community a comprehensive solution to report trades with the option to centrally clear and multi-laterally settle their off order book trades.
http://jlne.ws/GRpHNH (PDF)

Regulation leads to exchange regionalisation: NYSE Euronext official
Clare Hutchison – Reuters
Diverging regulation of financial markets will lead to a regionalisation of cash markets and make future consolidation between U.S. and European exchanges unlikely, the Executive Vice President of NYSE Euronext said on Tuesday.

Exchanges sing different tunes on consolidated tape
Paloma Migone – The Trade
Exchanges’ varying business models came to the fore at a conference, with Nasdaq OMX Nordic president Hans-Ole Jochumsen prioritising capital raising for SMEs over a pan-European consolidated tape.

CME raises margins on swap trades on U.S. default fears
CME Group Inc raised the margins on some products traded on its platform, citing likely market volatility in the wake of the U.S. debt ceiling debate.

Regulations and Enforcement

Dark pool stock trading picks up as Europe debates new curbs
Sinead Cruise and Simon Jessop – Reuters
Fund managers are trading more assets on private exchanges known as dark pools, a growing trend that clashes with regulators’ mission to improve financial market transparency.

Knight Capital Agrees to $12 Million Settlement for 2012 Errors
Sam Mamudi – Bloomberg
Securities regulators fined Knight Capital Americas LLC $12 million for the trading malfunction that roiled the U.S. stock market in August 2012, saying the firm ignored dozens of error messages before its computers bombarded exchanges with millions of unintended orders.

JPMorgan Expected to Admit Fault in ‘London Whale’ Trading Loss
Ben Protess and Jessica Silver-Greenberg – Dealbook
For JPMorgan Chase, fines totaling billions of dollars are no longer sufficient to placate the government. Now the bank’s regulators want something stiffer: a mea culpa.
**Et tu CFTC?  -JB

Wall Street watchdog signals new hurdles for clearing brokers’ records
Suzanne Barlyn – Reuters
Wall Street’s industry-funded watchdog issued new guidance late Monday that gives arbitrators more information about their responsibilities in a process that allows securities brokers to request the removal of customer complaints from their public records.


The Ted Cruz Trade
Steven M. Sears – Barron’s
The market is rallying on hopes of a debt-ceiling deal, but fear of Washington foolishness is still creating opportunities. This options trade is a win-win-win.

The VIX Trade of the Day: Playing Short-Term Volatility
Adam Warner – Schaeffer’s Investment Research
If you’re throwing your hands up and not trading during this “Will We Default, Won’t We Default,” I really can’t say I blame you. The risk is somewhat high that everything falls apart… or, at least appears to fall apart and shakes the market up.
**It is worth noting that this was written before a deal was struck in the Senate and it seems the House will have a vote on it.  The smart money is the shutdown and default will be ended soon (if only temporarily) but then with the bunch we have in congress these days one never really knows. -JB

Earnings Season: How to Invest
Steven M. Sears – Barron’s
Don’t be sore. Buy some more.
This old broker’s ditty comes to mind each morning with the latest batch of sell-side research urging John and Jane Investor to buy the latest hot stock or react to earnings news even though Washington has yet to solve the budget crisis.

Options Education

The Yin and Yang of Options
Russ Allen – The Options Insider
Yin and Yang? Are they Greek? No, they’re not. But the Greeks do measure certain characteristics of options, and each one of those characteristics affects the two parties to an option contract in equal and opposite ways, like Yin and Yang.
Over the last year I’ve written on many topics related to options, from very basic to fairly advanced. Today I’d like to go back to the basics a bit, and talk about some of options’ underlying concepts.
**I must meditate on this. -Grasshopper (aka JB)

Act on What you See, Not What you Believe
Bob Lang – CBOE
I can view stock charts and pictures in a way where they speak to me.  Basically, I look for patterns that repeat over and over.  Why?  Because human behavior is captured in these charts if you look closely enough, and that doesn’t change along the spectrum of fear and greed.
**I don’t even see the charts; all I see is blond, brunette, red head… -JB
**For those of you who don’t remember every line from every movie ever made, that’s from The Matrix. -SR





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