JLN Options: George Soros Doubles Down on Bearish Bet; Options cutting costs for some cross-currency swaps; Don’t Get Blindsided by the Next Volatility Outburst

Feb 18, 2014

Observations and Insights

Decisive Role: China making major moves on its economy
Jim Kharouf – John Lothian News

China always is on the financial market radar. It is also on the radar screen of economist David Hale, chairman of David Hale Global Economics, who just finished a report on China called “China’s New Dream.” (It can be found here in a PDF.)
What is notable to Hale is that the plenary session of the Communist Party Central Committee in November 2013 announced major reforms to help boost China’s economy over the next decade. That means that market forces, and market structures, will now play a “decisive role” in re-shaping China’s economy, which is considered a substantial upgrade in language from prior communiques which said market forces will play a “basic role.”
Read More >>> http://jlne.ws/1hsmFQZ

Lead Stories

George Soros Doubles Down on Bearish Bet
Steven Russolillo – The Wall Street Journal
George Soros built a big bet at the end of last year that the stock market was due for a tumble.
Mr. Soros’s hedge fund, Soros Fund Management LLC, boosted its so-called “put” position on the exchange traded fund market’s biggest and most widely traded fund, the SPDR S&P 500, known by its ticker symbol SPY. The ETF tracks the broad S&P 500 stock index.

Options cutting costs for some cross-currency swaps

Matt Cameron – Risk Magazine
 Dealers found a way to protect some cross-currency swaps from heavy new capital requirements last year, by adding foreign exchange options into the structure – but the powers of the technique are limited.

Don’t Get Blindsided by the Next Volatility Outburst
Most investors were caught off-guard by the stock market’s sharp correction in January.
From their price highs to their lows the S&P 500 (NYSEARCA:SPY) fell 6.1%, the Dow (NYSEARCA:DIA) 7.4%, and the Russell 2000 (NYSEARCA:IWM) 8.6%.  Investors went scrambling as the downturn quickly became the largest pullback in seven months, rivaling June 2013’s 7% pullback.

Expanded Trading Hours for SPX & VIX in Q3
Marty Kearney – CBOE
In the 3rd Quarter of 2014, CBOE intends to introduce Extended Trading Hours (ETH) for options on the S&P 500 Index complex (SPX, SPXW, SPXQ, SPXPM) and on the CBOE S&P 500 Volatility Index
(VIX), contingent upon completion of systems enhancements and Securities and Exchange Commission (SEC) approval of requisite rules.

FX Traders Facing Extinction as Computers Replace Humans
Ambereen Choudhury and Julia Verlaine – Bloomberg
A widening probe of the foreign-exchange market is roiling an industry already under pressure to reduce costs as computer platforms displace human traders.
Electronic dealing, which accounted for 66 percent of all currency transactions in 2013 and 20 percent in 2001, will increase to 76 percent within five years, according to Aite Group LLC, a Boston-based consulting firm that reviewed Bank for International Settlements data. About 81 percent of spot trading — the buying and selling of currency for immediate delivery — will be electronic by 2018, Aite said.

Nadex Looks To Expand Forex Binary Expirations After Volume Doubles Year-Over-Year
Darrell Martin – Benzinga
The Nadex average daily volume on contracts increased 106 percent in 2013 compared to 2012. See release HERE. Traders are realizing the benefits of trading binaries on a regulated exchange and the benefits Nadex price ladder binaries offer.

A Study in Volatility Hindsight
Adam Warner – Schaeffer’s Investment Research
Can we now officially put the Jan. 24 volatility pop in the history books? I will say yes. I’m not saying we won’t see another pop soon, just that if in fact we do see a pop, it’s essentially a new “event.” Enough time and price action has passed that we can better analyze this past one.

Swaps Pioneers Recall Wild West Days as Trades Go Digital
Matthew Leising – Bloomberg
Once, the market for interest-rate swaps fit in your pocket.
The year was 1982, when Thomas Jasper, the former Salomon Brothers Inc. banker who helped co-found the International Swaps & Derivatives Association, realized the time was right to open trading to speculators. Swaps up to that point had only been done in concert with bond issuance, locking them away as an investment banking tool. Jasper, 65, helped write the contract that standardized the trades, unleashing business and controversy on Wall Street for decades to come.
**Yippee ki-yay… -JB

Videocast: VIX trading reverses

Real-Time Risk: Keeping It Real
Jake Thomases – Waters Technology
Pitches for real-time risk solutions focus more on the sell side than the buy side. Jake Thomases set out to determine how much hedge funds and asset managers care about calculating risk in the blink of an eye. Some do, but it’s largely dependent on their trading strategy.

TABB Group: Incumbents Are Prepared As SEFs Go Live This Week
Phil Albinus – Traders Magazine
SEF data confirms that the vast majority of interest rate swaps are traded on the traditional dealer-to-dealer platforms, with 94 percent of SEF trades on average executed on these venues in the first four months of trading.


NYSE’s New York City Footprint May Shrink
Bradley Hope and Keiko Morris – The Wall Street Journal
 The New York Stock Exchange, an institution that has long been at the heart of downtown Manhattan’s identity, is considering a reduction of its presence there as its new parent company cuts jobs and moves positions out of the city.

Regulation and Enforcement

EU lawmakers delay money market, benchmark rules
Huw Jones – Reuters
European Union lawmakers have delayed new rules to regulate money market funds used by big companies to park billions of euros after they clashed over how tough the changes should be.

EMIR trade reporting “untrustworthy, incomplete and flawed”
Elliott Holley – Banking Technology
Europe’s trade repositories have reported a largely smooth transition, following the deadline under EMIR on 12 February – but behind the scenes deep questions remain about the viability of the European Commission’s ambitious derivatives reform.


Spikes in Options Volatility Offer Opportunity
Steven M. Sears – Barron’s
It’s OK to be cautiously optimistic on the stock market amid the sharp debate about economic growth, or lack thereof.
Major indexes should advance in 2014, though the gain is likely to come in a saw-toothed pattern that will make 2013’s advance seem smooth and undramatic in comparison.

Trading the Trends
Bob Lang – CBOE
The best trends rarely give you a chance to get in.  Especially in a fast-moving market.  Witness these past couple of weeks, when markets seemed to crack below support but then do some heavy lifting to get back above short term resistance.   The affects of these deep moves would make anyone queasy.

Investor Jujitsu Part 1: The Volatility Dividend
Seeking Alpha
In Japanese, Jujitsu signifies the art of using an opponent’s force against him instead of using one’s own force. In the 21st century of equity investing, there exist several sneaky ways in which other investors’ mistakes can be predicted and used against them for profit. Part 1 explores what is perhaps the sneakiest investor Jujitsu technique: shorting leveraged ETF pairs to create a steady, synthetic dividend.


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