JLN Options: First Hint of U.S. Stock Losses Fuels Rush for Insurance; Small-Cap Selloff Leaves Fewer Stocks Shouldering Rally; Is Volatility Really Back?

Sep 23, 2014

Lead Stories

First Hint of U.S. Stock Losses Fuels Rush for Insurance
Callie Bost – Bloomberg
After three years of non-stop gains in the U.S. stock market, investors are loading up on insurance at the first sign of trouble.
An index that tracks the cost of options used to hedge against a plunge in the Standard & Poor’s 500 Index has jumped to the highest level in almost 16 years, according to data compiled by Bloomberg. Stocks fell and volatility surged yesterday, sending the benchmark gauge for U.S. equities to its biggest loss in seven weeks, on concern over the outlook for Chinese stimulus and the health of the U.S. economy.

Small-Cap Selloff Leaves Fewer Stocks Shouldering Rally
Joseph Ciolli and Callie Bost – BloombergBusinessweek
The biggest tumble for smaller companies in seven weeks underscored weakening breadth in the American bull market two weeks after its 5 1/2-year birthday.
Shares tracked by the Russell 2000 Index (RTY) slid 1.5 percent, the largest retreat since July 31. While the Russell 3000 Index touched an intraday record at the end of last week, fewer than 55 percent of its components traded above their 200-day moving average, a combination that hasn’t happened since the peak of the dot-com bubble, according to MKM Partners LLC. The Chicago Board Options Exchange Volatility Index (VIX) jumped 13 percent for its biggest rally in seven weeks.

Is Volatility Really Back?
Adam Warner – Schaeffer’s Investment Research
Pay no attention to that CBOE Volatility Index (VIX) on your screen. It took a 13% rally yesterday just to get it back to the mid-13s.
Volatility is back, baby! So says David Rosenberg:

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GFI Sale Talks With BGC Said Stuck on Confidentiality Agreement
Matthew Monks – Bloomberg
GFI Group Inc. (GFIG) and rival brokerage BGC Partners Inc. (BGCP) are mired in a dispute over a confidentiality agreement that is keeping them from starting formal merger talks, people with knowledge of the matter said.
GFI has asked BGC not to recruit key employees for a period of time before talks to discuss BGC’s $675 million takeover offer can begin, the people said, asking not to be identified discussing private information. BGC Chief Executive, Howard Lutnick, has balked at the request and is considering moving forward with a tender offer for GFI’s shares without first getting a confidential look at its books.

Silver Open Interest Reaches Six-Year High on Short Bets
Debarati Roy – Bloomberg
Holdings in New York silver contracts reached the highest in more than six years after investors added to bets that the metal will extend a slump as prices fell to the lowest since 2010.
Open interest in Comex futures rose 3.4 percent last week week to 176,501 contracts, the highest since February 2008, according to data compiled by Bloomberg. The measure was 171,000 contracts as of yesterday. Combined holdings in futures and options is at the highest in almost 17 months, U.S. government data show.

India VIX rebounds from record low amid higher futures rollover
Santanu Chakraborty – LiveMint
Options traders are paying the most in almost two months to protect against swings in Indian stocks ahead of monthly derivatives expiry on 25 September.
The India VIX index, a gauge of protection against stock-market losses using options, rebounded 7.3% from a record low of 11.6 on Monday, the steepest climb since 1 August.


CBOE SKEW Index Hits 146.08 – Highest Value Since 1998 Shows Demand for Portfolio Protection
Matt Moran – CBOE Options Hub
In a recent column on Bloomberg.com, Callie Bost wrote –
“After three years of non-stop gains in the U.S. stock market, investors are loading up on insurance at the first sign of trouble. … Concern that the losses will worsen has increased demand for shorter-dated, out-of-the-money options designed to protect a portfolio’s value. The Chicago Board Options Exchange’s SKEW Index, which tracks expectations for an outsized drop in U.S. stocks known as tail risk, reached 146.08 Sept. 19, the highest level since October 1998. … The gauge has averaged 129.77 over the past 12 months, compared with a mean of 122.82 during the past five years …”

Regulation and Enforcement

How to Fix Our Financial Early-Warning System
Editors – Bloomberg
Six years after the 2008 crisis, U.S. financial markets are again displaying signs of excess. Stocks keep hitting new highs despite a lackluster economy. Investors are lending money on extremely easy terms to all kinds of risky borrowers, from highly leveraged companies to car buyers with questionable ability to pay.

Derivatives industry calls global reporting plan a dream
Huw Jones – Reuters
Plans for a global snapshot of risks in the financial derivatives market are a “dream” that must not detract regulators from tackling discrepancies in trade reporting, a top industry official said on Tuesday.
Following market mayhem after the collapse of Lehman Brothers bank in 2008, the Group of 20 economies (G20) agreed that data should be collected on who holds derivatives contracts like interest rate or credit default swaps.

SEC Finds Misrepresentations by Hedge Funds, Bowden Says
Some hedge funds misrepresent their performance in advertising and marketing materials and fail to follow their own procedures for valuing investments, a top U.S. Securities and Exchange Commission official said today.
SEC reviews completed as part of a two-year effort involving nearly 200 funds have found cases where potential investors were given only the most favorable description of past performance rather than full disclosure of winning and losing bets, SEC Compliance and Examinations Director Drew Bowden said in a speech at a conference in Philadelphia.

ISDA chief praises ex-industry tormentor Gensler
Christopher Whittall – IFRAsia
Gary Gensler was the thorn in the side of the derivatives industry for over three years during the drafting and implementation of the Dodd-Frank Act, so it may have raised some eyebrows to hear ISDA’s new chief executive heap praise on the man who oversaw the biggest overhaul in the history of the US$710trn swaps market.

S.E.C. Makes Largest Ever Whistle-Blower Award
Dealbook – NY Times
The identity is a mystery, but someone who provided important information to  regulators in a securities fraud enforcement action is suddenly $30 million richer thanks to a federal whistle-blower law.
The Securities and Exchange Commission announced on Monday that it had approved a payment of between $30 million and $35 million to an unnamed individual who lives in a foreign country, for providing information that helped federal authorities “detect an ongoing fraud.”

FIA posts exclusive interview with CFTC chairman Tim Massad
Automated Trader
The Futures Industry Association interview with Commodity Futures Trading Commission chairman Tim Massad, covers a number of regulatory issues now pending at the CFTC, including the talks with European regulators on clearinghouse recognition and the need for “fine-tuning” of Dodd-Frank rules. The interview also provides insights on Massad’s priorities as CFTC Chairman, including the need to improve the quality of the data that the agency is collecting.


Volatility as an Asset Class
Volatility is often thought of as a yardstick of risk, but to experienced traders, it’s an asset unto itself, Paul Stephens, head of institutional and international marketing at Chicago Board Options Exchange, told Markets Media.
“Many people might think of volatility as a risk factor, or something that you need to think about as something that’s a negative,” he said. “The most important thing is to turn that around, and talk about how volatility itself can be thought of as a source of opportunity, and this notion of volatility as something that’s tradable You can invest in it.”

Gold Could Get Bounce Ahead Of Options Expiration Unless Macro Headwinds Prevail
Kitco News (via Forbes)
Comex gold potentially could get a modest lift in the next couple of days from activity related to an options expiration set for Thursday, although any impact also may well end up being nullified by the improving U.S. macroeconomic picture, traders said.
Expiration of October options for gold and silver is scheduled for Thursday.

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