JLN Options: Hong Kong Property Stock Gloom Seen Deepening in Options Market; Yuan Options Most Bearish in Asia as Traders Ready to Fight PBOC; Bank rout – exposure to commodity derivatives stirs fear

Feb 3, 2016

Observations & Insight

UPS Currency Hedges Largely Shield Profit as U.S. Imports Surge
Tatyana Shumsky – WSJ
A currency hedging program largely shielded United Parcel Service Inc. profit from the impact of a rising U.S. dollar, allowing the delivery company to benefit from a surge in U.S. imports, finance chief Richard Peretz told investors and analysts on the company’s fourth-quarter earnings call on Tuesday. Last year’s record-setting rally pushed the dollar to multi-year highs against the currencies of major U.S. trading partners including the euro-bloc, Canada and Australia, reducing the value of profits companies earned in those currencies when they are exchanged into U.S. dollars. For UPS, which operates in 220 countries and territories, the currency volatility dragged down revenue growth, but hedges tempered the dent to profits, said Mr. Peretz, UPS’s chief financial officer.

****SD: This article was opaque about what UPS’ currency hedging entailed. The only details I could garner from some interneting was this 2010 article from a UPS treasury manager, Managing Exposures at UPS. From the piece: “Our policy is to use options almost exclusively, as we value the flexibility they offer. We put in place collars, buying puts and selling out-of-the-money calls to finance the position. Ordinarily we purchase options at, or slightly out of the money, with the aim of achieving the budget rate as closely as possible. The call is then set based on the level of premium that we want to spend.”  I suppose it is quite heartening to have a parcel distribution and logistics company that is capable of planning and delivering. It does not appear that UPS is actively involved in formal fuel hedging, ala most of the major airlines (which hasn’t gone as planned this year), instead opting for the indirect hedge of a fuel surcharge (which recently rose). See: Why You’re Still Paying Fuel Surcharges After the Oil Crash. More on the status of UPS in light of earnings at UPS finance chief says Amazon doesn’t worry him. For the record, I’ve been a FedEx guy ever since I realized their logo has that subtle arrow in it. More on the ramifications of currency strength for corporations from Mauldin: The Dollar Dog Ate Corporate America’s Homework: 6 Casualties of the Strong US Dollar

Lead Stories

Hong Kong Property Stock Gloom Seen Deepening in Options Market
Kana Nishizawa Moxy Ying – Bloomberg
As Hong Kong property prices slump with real estate stocks, investors are looking to the options market for protection. Traders paid the most in four years in January to hedge against losses on Sun Hung Kai Properties Ltd. versus the cost of bullish bets, according to data compiled by Bloomberg. A similar pattern emerged in options on Wharf Holdings Ltd. A measure of the city’s property stocks is down 33 percent in the past year, with losses accelerating in January as the Hong Kong dollar weakened and real-estate sales fell to the lowest in at least 25 years.

****SD: China’s real estate market as a whole is in a terrible way. The following is from a SCMP article from around a week ago: “Property inventory in China rose to a record 6.2 billion square metres by the end of 2015, which, according to the China Index Academy, would take at least five years to clear at the current speed of sales.” Here’s an odd thing I stumbled across about that 6.2 billion number: “According to the Guangming Daily, between 1979 and 1988, 6.2 billion square meters of housing were built in rural China.” That comes from a Congressional Report, China’s Economic Dilemmas in the 1990s. Also from the SCMP, Hong Kong property sales plummet to lowest in 25 years and the worst is on the way. Worth keeping an eye on.

Yuan Options Most Bearish in Asia as Traders Ready to Fight PBOC
Saijel Kishan – Bloomberg
Traders are paying more to bet on a yuan decline with options than they do for any other Asian currency, suggesting bears are regrouping after being thwarted by the central bank last month.
The extra cost for three-month options to sell the yuan against the dollar in the Hong Kong market over contracts to buy jumped in January by the most since 2011, approaching the record seen after its Aug. 11 devaluation. The value of contracts carrying the right to sell the yuan at or beyond 7 per dollar — 5.5 percent weaker than the current spot rate — surged more than 50 percent last month.

****SD: Also, Blooomberg’s Rupee Seen Less Volatile Than Yuan as Rajan Calls for Discipline and Reuters’ Bets against China’s yuan build as traders eye G20 deal

Bank rout: exposure to commodity derivatives stirs fear
Victoria Thieberger – The Australian
A variety of explanations has been put forward for the global share rout since the calendar ticked over to 2016. Most focus on the slowdown in China, a possible US recession, the 70 per cent collapse in oil and/or its highly unusual correlation with stocks.
But these are merely red herrings that are distracting investors from what could be the key underlying factor connecting the rout in bank shares to the commodities slump, according to Gavekal Economics.

Citadel’s COO, Rich Mazzella Slated to Leave By Month’s End
Jeff Patterson – Finance Magnates
Citadel Investment Group is slated to have a key vacancy at the end of February, following a recent report that Rich Mazzella, the group’s Chief Operating Officer (COO) will be parting ways with the group by month’s end.


CBOE Holdings Reports Fifth Consecutive Year of Record Financial Results
Press Release
CBOE Holdings, Inc. (NASDAQ: CBOE) announced today its financial results for the fourth quarter and full year ended December 31, 2015.
For the quarter ended December 31, 2015, the company reported GAAP net income allocated to common stockholders of $50.2 million, or $0.61 per diluted share, compared with $49.1 million, or $0.58 per diluted share, in the fourth quarter of 2014. On an adjusted basis, net income allocated to common stockholders was $48.9 million, or $0.59 per diluted share, compared with $53.6 million, or $0.64 per diluted share, in the prior year period. GAAP operating revenue for the fourth quarter was $156.0 million, down 6 percent compared to $166.5 million in 2014’s fourth quarter. Adjusted operating revenue was $154.0 million, down 8 percent compared to $166.5 million in the fourth quarter of 2014.

****SD: In somewhat related to CBOE news, former CEO David Harris joined the board of advisors of Elliptic, “a blockchain intelligence and security firm.”

Intercontinental Exchange reports ICE & NYSE January 2016 statistics
Press Release
Futures volume up 15% y/y including interest rates up 27% and oil up 23% y/y; cash equities volume up 28% y/y. Link to full statistical breakdowns.

****SD: Also see FOW’s ICE Futures Europe sees Stirs recovering. From that article: “Atlanta-based ICE said on Wednesday its January volumes were up 10.6% on the same month last year to 6.14 million contracts, due largely to a 60% increase in financial futures and options trading.”

CBOE to Begin Overnight Dissemination of CBOE Volatility Index
Press Release
The Chicago Board Options Exchange (CBOE) today announced that it plans to begin overnight dissemination of the CBOE Volatility Index (VIX Index) in March.
Values for the VIX Index are expected to be published every 15 seconds during CBOE’s extended trading hours session for VIX and S&P 500 Index (SPX) options, which runs from 2:00 a.m. to 8:15 a.m. CT.

Euronext, ASX have mixed start to 2016
Julie Aelbrecht – Futures & Options World
Euronext volumes fell 7.7% while ASX saw daily activity up 6% in January
European exchange Euronext became on Wednesday the first major exchange to report trading levels down in January as the Australian exchange joined the list of markets that saw a strong start to 2016.

MIAX Options Reports January 2016 Trading Activity; Remains #1 in Time at NBBO for Both All Option Classes and Penny Pilot Option Classes for December 2015
Press Release
MIAX Options Exchange (MIAX) today announced that over 20.5 million contracts were executed on MIAX in January 2016, equating to an average daily volume (ADV) of over 1 million contracts. The over 20.5 million contracts executed represents a 32.8% increase from the approximately 15.5 million contracts executed in January 2015 and a 6.7% decrease from the over 22 million contracts executed in December 2015. MIAX’s January equity options market share of 6.30% represents a 30.4% increase from the 4.83% achieved in January 2015 and a 12.5% decrease from 7.20% achieved in December 2015. For the entire U.S. equity options industry, January’s ADV was over 17 million contracts, or a 7.13% increase from January 2015’s ADV of over 16 million contracts.

HKEX Chief Executive Charles Li: Why Our Strategic Plan Is Important To Hong Kong
Press Release
We recently unveiled our third three-year Strategic Plan since I’ve been at HKEX, and it’s our most ambitious yet. Our first plan aspired to go into commodities, and we bought the London Metal Exchange. Our second plan aspired to develop mutual market access and connect with Mainland China’s equity market, and we launched Shanghai-Hong Kong Stock Connect. Now we have a new plan for 2016 to 2018, and given our bold aspirations, people are asking me why we have such an ambitious agenda and how we can achieve it.

ICE Futures Jan coal volume more than doubles on month to record high
The volume of coal traded and cleared on the ICE Futures platform during January more than doubled December’s 100.5 million mt to a record high 238 million mt, according to data from energy exchange ICE Futures Europe and electronic trading platform globalCOAL Wednesday.

****SD: From the release: “January’s monthly volume comprised 54.7 million mt of options, making up 31% of the total, which was more than seven times higher than December’s 10.2 million mt, but 24% down year on year.”

This Upstart Market Hopes to Grow With `Flash Boys’ Strategy
An upstart stock market wants to bring the fight against the flash boys to Europe.
Aquis Exchange Ltd. has failed to gain traction after more than two years of operation. Now, it’s introducing a rule that will explicitly ban what it considers a predatory strategy known as latency arbitrage — or using the fastest sources of information on prices to take advantage of traders with slower data feeds.
“They’re not supplying liquidity,” said Alasdair Haynes, the founder of Aquis. “Those types of strategies, we don’t want to see on Aquis.”

****SD: Also, FT’s Aquis Exchange bans ‘predatory’ high-speed trading

Regulation & Enforcement

Futures markets regulator absent from SEC discussion of volatility
Francine McKenna – MarketWatch
Equity markets professionals met on Tuesday morning at the Securities and Exchange Commission to diagnose what went wrong last Aug. 24 when markets experienced an unnerving level of volume and volatility. But the Commodity Futures Trading Commission is missing from that group, despite the fact that equity-related futures markets also experienced extraordinary volume and significant price volatility on that day.

****SD: Just another installation in the SEC soap opera. In case you missed it, SEC Invite List Offends NYSE, Nasdaq

Derivative clearing could be harmed by final rule
Nathan Dean, Sarah Jane Mahmud and Benjamin Elliott – Bloomberg Intelligence
Regulators set to clash on leverage ratios harming derivatives
U.S. and EU regulations that threaten to make clearing derivatives too expensive for banks may get reconsidered in 2016. The final leverage ratio rules require banks to count clients’ collateral as their own assets, potentially leading to higher capital requirements. Several banks consequently have reduced operations or increased prices. The Basel Committee on Banking Supervision is expected to act this year, but U.S. banking regulators are likely to resist before the rules become effective in 2018.

Rule 48 Nears Its End at the NYSE
Bradley Hope – WSJ
The New York Stock Exchange is moving to end a controversial rule that observers say worsened volatility last August 24th, according to an executive. The rarely-used Rule 48 was originally designed to help dampen volatility by letting market-makers forgo disseminating information about how stocks might trade at the opening. But on Aug. 24, the rule ended up exacerbating problems and delayed trading for some stocks.

****SD: The FT’s take on the end of Rule 48 here

The Most Thankless Job on Wall Street Gets a New Worry
Emily Glazer – WSJ
Who wants to be a compliance officer?
Those officers on Wall Street in charge of ensuring that traders and other employees stay on the right side of laws and regulations are increasingly in the cross hairs themselves.
Several recent enforcement actions found compliance officers personally liable for mistakes within their firms. Meanwhile, New York’s principal financial regulator, backed by New York Gov. Andrew Cuomo, wants the power to seek criminal charges against compliance officers in some cases.


Green Key, TT, OpenFin Partner – Green Key Technologies
Press Release
Green Key Technologies, creator of an award-winning voice workspace designed for financial market voice collaboration, today released its first web-based platform, Voice Box, in conjunction with the launch of a third-party Partnership Program. Green Key will upgrade all current users to the new HTML5 voice workspace, the first in the industry to bring sophisticated trader voice capabilities to a broad range of devices that includes low-cost touch-screen tablets.

****SD: I’m all about sophistication in my plethora of low-cost devices.

Big Data: Transforming Financial IT and the Data Center
Richard Jenkins – Finance Magnates
‘Big data’ is a phrase that encapsulates a whole range of capital market advancements, innovations and disruptive services, including regulatory compliance, risk management, market sentiment analysis, fraud detection systems and complex algorithmic trading models.

****SD: If you thought that the “6.2 billion square metres” comment from the Chinese real estate story was hard to conceptualize — it’s a ton of Olympic swimming pools or something — try to figure out “The world creates 2.5 quintillion bytes of data a day (2.3 trillion gigabytes).”

EU and US reach deal on data sharing
Duncan Robinson – Financial Times
The US and EU have agreed a new arrangement for transferring data across the Atlantic — to the relief of technology companies such as Facebook and Google which feared being forced to store information on European servers. Under the deal, a top US director of national intelligence will personally sign a pledge that the US government will avoid “indiscriminate mass surveillance” of EU citizens when their information is sent from Europe to the US.

****SD: Admittedly not an options story, but one with far-reaching implications.


Options Traders Position For Return Of Market Volatility
Joe Kunkle – See It Market
One of the most important takeaways from tracking options trading flow on a daily basis is finding important themes in a days, or week’s activity. Often this is seen when a number of names in a certain sector are seeing bullish/bearish flow, trader’s position in the options market well ahead of sector rotations in the underlying stocks. In rare cases there is a common strategy seen, a signal of how the smart money sees the current environment and the best way to utilize options trading to capitalize on it.
The latter was the case yesterday as seven different stocks saw large purchases of March strangles, expecting moves higher in implied volatility and positioning for these stocks to trade outside a wide range. If history is a guide, I would expect to see this activity continue the next few trading sessions, and likely then see markets put in an intermediate peak.

An Enticing Trade for Aggressive Investors
Steven M. Sears – Barron’s
Huntsman (ticker: HUN), which rarely attracts attention in the stock and options market, is an early Valentine’s Day present for options traders.
The chemical company’s one-month options implied volatility is around an annual high of 64%. By Goldman Sachs’ estimation, Huntsman’s stock will move an extraordinary 14%, up or down, when it reports fourth-quarter earnings on Feb. 11.

****SD: Attila would be proud.


Cyber Security Stocks Can’t Hack Rally With $700 Million Erased
Joseph Ciolli – Bloomberg
Investment in cyber-security companies has been anything but safe in 2016.
In the U.S. stock market, a five-year-old index tracking network security firms has slipped 14 percent in 2016, more than double the loss for the Standard & Poor’s 500 Index. Price declines and investor withdrawals have halved the value of an exchange-traded fund tied to the shares after swelling to a record $1.4 billion in July.

****SD: “Options traders are signaling that the pain may continue for cyber-security stocks.”

Indicator of the Week: Implications of a Volatile SPX
Rocky White – Schaeffer’s Research
Intraday volatility has come back recently. I measure intraday volatility as the range between the high and the low on the S&P 500 Index (SPX) as a percentage of the index. Looking at the average intraday range over the past month (21 trading days), it moved back above 2%. You can see on the chart below that since the financial crisis, there have been just a handful of moves above this level. This week I’ll take a look at the historical implications of this. I’ll also compare the intraday range among different indexes and sectors.


CBOE RMC, Feb. 29-Mar 2, 2016, Bonita Springs, FL
Now in its 32st year in the U.S., the annual CBOE Risk Management Conference (RMC) is the premiere financial industry conference designed for institutional users of equity derivatives and volatility products. Hosted by the Chicago Board Options Exchange (CBOE), RMC is an educational forum dedicated to exploring the latest products, trading strategies and tactics used to manage risk exposure and enhance yields. RMC brings together top traders, strategists and researchers, enabling participants to learn the state-of-the-art in investment risk management from true experts in the field. Learn more HERE and register for the event HERE

****SD: John Lothian News is a media sponsor for this event.

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