JLN Options: Hedge Funds, Volatility ETN Flows Tell Different Stories; Oil Stocks Lure Most Bearish Bets Since 2007: Options; Trading on a Not-So-Level Playing Field

Oct 30, 2014

Observations and Insight

Clive Furness, managing director, Contango Markets – Commodities’ Oddities

“Commodities are now so much part of the infrastructure of the marketplace and the asset classes that buy side investors get involved with…that they are going to continue to look for those opportunities.”

Clive Furness, managing director of Contango Markets, discusses commodities and how the commodities markets function. Starting with a brief history of commodities, Furness illustrates why commodities sit uneasily with other mainstream products and the pros and cons of the situation. He then discusses the evolution of commodities, covering the shift in technology and people’s attitudes then and now. Finally, Furness gives his predictions and thoughts on the future of commodities and discusses a project he is currently working on with an African exchange in order to build the products the exchange will trade.

Watch the video »

Lead Stories

Hedge Funds, Volatility ETN Flows Tell Different Stories
Todd Shriber – ETF Trends
Some would argue there is almost no such thing as an “easy trade,” but over the past couple of year, shorting volatility has come close.
Over the past two years, the VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV) and the VelocityShares Daily Inverse VIX Medium Term ETN (NYSEArca: ZIV) have each more than doubled. At the close of U.S. markets on Oct. 28, XIV was a $1.4 billion ETN. ZIV, though far smaller, can at least say it is well above the $100 million in assets under management mark with nearly $144 million in assets.

Oil Stocks Lure Most Bearish Bets Since 2007: Options
Traders are speculating the slump in oil companies will get worse. Even after valuations for an index tracking the shares slumped 40 percent, investors are loading up on bearish options. The cost of puts on the SPDR S&P Oil & Gas Exploration & Production ETF jumped to the the highest level in seven years versus calls. The exchange-traded fund tracks companies including Exxon Mobil Corp., Chevron Corp. and ConocoPhillips, which are down more than 9 percent from their highs this year.

Trading on a Not-So-Level Playing Field
Adam Warner – Schaeffer’s Investment Research
Is there no end to SEC bias? If it’s not the new NCAA playoff, it’s the advantages conferred to a few favored “traders.”Let me get this straight: Algos can execute orders far faster than humans for a variety of reasons. So, they can react to news before you can anyway, even if they get the news at the same time. That’s not enough of an edge, though. They now can literally see the news before you can. A second early might as well be an hour. A minute early is like a year.

The Brazilian Election and Volatility Market
Russell Rhoads – VIX Views
On Monday the Brazilian equity market reacted somewhat as expected to the re-election of Dilma Rousseff to another term as president of Brazil. When I say as expected, Rousseff is not considered very business friendly and her election resulted in about a 4% drop in the iShares MSCI Brazil Index ETF (EWZ).   This 4% drop was on top of EWZ being down 23% from the 2014 high as the election date approached and the equity market started to discount Rousseff’s re-election.

Greece’s Euro Dilemma Is Back as Minister Sees Volatility
Greek bond investors face a rollercoaster ride for the next four months as the government tries to contain the risk of snap elections, Minister of Administrative Reform Kyriakos Mitsotakis said. Prime Minister Antonis Samaras has until February to pull together a supermajority in the national parliament to elect a new president or the anti-bailout opposition party Syriza will force a snap election. That would return Greek voters to their 2012 dilemma when the country’s membership of the single currency hung by a thread, Mitsotakis said in an interview.

Retail Investors Flock to Derivatives for Income and Safety
The Street
Retail investor interest in derivatives continues to grow as investors learn more about trading the instruments and see it as an attractive way to hedge against risk and generate income, according to online brokers and industry data.

Videocast: Fears of another drop


NYSE Experiences Brief Technical Glitch
Bradley Hope And Daniel Strumpf – WSJ
A critical piece of infrastructure that underpins U.S. stock markets experienced technical problems and caused confusion among traders and investors for nearly an hour this afternoon.
The problems started after a “network outage” at the New York Stock Exchange’s data center in Mahwah, N.J., according to people familiar with the matter. The exchange was forced to transfer all operations to its disaster recovery center in Chicago.

CME profit rises 22.5 pct on higher trading volumes
CME Group Inc, the world’s largest futures market operator, reported a 22.5 percent rise in quarterly profit, helped by strong trading volumes.

CME Group Inc. Reports Third-Quarter 2014 Financial Results
Press Release – CME Group
CME Group Inc. (NASDAQ: CME) today reported revenues of $762 million and operating income of $430 million for the third quarter of 2014.  Net income attributable to CME Group was $290 million and diluted earnings per share were $0.86. Excluding the items noted in the reconciliation, adjusted earnings per share would have been $0.841.

Regulation and Enforcement

SEC Tried to Make Markets Fair. Here’s What Happened.
Nick Baker and John Detrixhe – Bloomberg
Two decades ago, a system for sending U.S. corporate filings over the Internet was hailed as a victory for transparency. Today, the Securities and Exchange Commission’s Edgar website is engulfed by concern over opacity.

SEC Warned Before About Early Release Weak Spot
Scott Patterson and Ryan Tracy – MoneyBeat – WSJ
Securities and Exchange Commission officials were tipped off earlier this year that some traders could be getting regulatory filings shortly before they’re published on the agency’s website, according to people familiar with the discussions.


Volatility Is Still Outperforming the S&P 500
After the Volatility S&P 500 ETF (VIX) spiked to 30, Wall Street’s Kool-Aid drunks are back to saying that stock market volatility is over. It’s done. And it’s never returning. The Santa Claus rally in small-cap stocks and tech stocks smack dab in the middle of October, now has Silicon Valley meditating it’s next round of initial public offering money losers.

Eliminate the negative
The Economist
Pity the pension-fund manager. Cash pays close to zero in many developed economies and ten-year Treasury bonds offer a yield of 2.3%. But many managers need much higher returns if they are to pay the benefits they have promised. That forces them to pile into equities, despite the risks of big bear markets like 2001-02 or 2008-09, not to mention minor scares like mid-October’s wobble.

Managing Risk In A Rollercoaster Market
A friend said recently, “You never truly understand your risk tolerance until you actually have money on the line.” I get it; the stock market can be a scary place, especially when volatility is on the rise, as it has been this October. Early in the month, the Dow Jones Industrial Average (the Dow) marked its biggest single-day gain (nearly 275 points) and its biggest single-day drop (335 points) since 1997—on back-to-back days. It’s been a rollercoaster ride ever since.

Options Education

Volatility: The difference between implied and realized
Suzanne O’Halloran – Yahoo Finance
With the Fed’s QE3 kaput and their continued pledge to keep interest rates near zero for a “considerable time” has many investors betting volatility will subside and markets will normalize. This is also known as implied volatility or more simply what the market is expecting. This is evident in the  CBOE Volatility Index (^VIX) which has dropped to the 15 level down from the October highs of 31.


The Options Industry Council Announces Investor Education Day in the San Francisco Area November 15
Press Release – OIC
The Options Industry Council (OIC) today announced that its fourth and final Investor Education Day (IED) for 2014 is being held in Millbrae, CA on November 15.
Options are an ideal tool for a variety of investors and market conditions. The popular, and free, all day options education program is taught by experienced instructors from the various options exchanges and OIC professionals. This event is the second of two IED’s hosted by OIC this fall to help investors develop their knowledge and ability to responsibly trade options.

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