Observations & Insight

What a dig deeper reveals about the listed US equity option market
Gary Delany – Tradingfloor.com
Research firm TABB Group estimated in an April 2014 survey that 24% of the total listed equity option volume in the US came from retail customers, 28% from institutional customers, and 48% from market makers.
bit.ly/1RJu1PN

***SR: The OIC’s Gary Delany reports on the TABB Group study, as well as a Harris Poll study on reasons why US investors use equity options. The article contains links to both.

Beating the Odds – Susquehanna International – Jeff Yass
Philadelphia Magazine
Jeff Yass was always a little different from his peers — a brilliant young man taken with poker and horse racing and the power of rational decision-making. He’s used all of it to turn his company — Bala Cynwyd’s stealthy and mysterious Susquehanna International — into one of the world’s most lucrative and powerful financial firms
bit.ly/1PUu4X7

****SD: Consider this a “from the archives” addition to today’s newsletter. Published in 2009, the article about one of Susquehanna’s low-profile heads has the feel of a quick read despite being a longform feature. It’s one of my favorite pieces related to the options space with all the requisite anecdotes and tension of a revealing history/profile/analysis. All of this was accomplished despite Yass declining to be interviewed for the piece — a testament to good journalistic and storytelling practices. More recently, Yass made headlines for his large contributions ($2.3m) to Rand Paul super PACs and to Sen. Anthony Williams’ failed bid for Philadelphia mayor.

Lead Stories

Investors in Market Volatility Enjoy Wild Ride; Almost 19 million options contracts on average changed hands each day in the U.S. last week
Christopher Whittall – WSJ
Markets around the world are volatile. That’s good news for those who make their living on gyrations.
Banks and asset managers offer a variety of ways to bet that markets will be choppy. So-called volatility funds typically invest in options contracts that rise in value when markets spike or plunge.
From 2012 until the middle of last year, volatility was a bad bet, at least in stocks: Markets more or less went up. But wobbles last summer started drawing investors back in—and this year’s wild ride is poised to be an even bigger attraction.
on.wsj.com/1PUECFD

Chinese Options Signal Stocks Not Yet Out of the Woods: Analysis
Tanvir Sandhu – Bloomberg
China equity option term structures have aggressively inverted over the past week and implied volatilities are edging closer to peaks seen during August rout, as yuan devaluation roils global markets, Bloomberg strategist Tanvir Sandhu writes.
bloom.bg/1PUDAtl

Strong dollar inflicts more pain on oil as bearish options bets build
The Fiscal Times
A stronger U.S. dollar is compounding an oil market rout that has seen crude prices fall by almost 20 percent this month, and options trades suggest the market is preparing for deeper losses ahead.
bit.ly/1PUII0v

****SD: Also see Bloomberg’s Oil Trades Near 12-Year Low as U.S. Surplus Seen Worsening and Commodity Returns Fall to Lowest Since at Least 1991 on Oil Rout. Today’s action was partly spurred by mixed messages from OPEC members.

What VIX Futures Really Tell Us
Adam Warner – Schaeffer’s Research
They talk a lot about volatility on TV. I joke about it (often) as in “everybody expects higher volatility going forward … always,” but I do understand the genesis behind the fixation. Volatility = ratings. The more volatile we get, the more likely we are to tune in to financial TV, read financial websites, log in to our accounts, trade, invest, cry, etc.
It’s good for business in every which way. So it pays to sell “volatility” (the concept, not actual options). And when there’s no actual volatility, sell the perception of volatility.
bit.ly/1JIgbvY

The Crop Surplus is Bad News for America’s Farms
Alan Bjerga and Jeff Wilson – Bloomberg
The American farm boom is all but over.
Farmland values are down from all-time highs. Global surpluses left corn and soybean prices below the cost of production. And the amount of agricultural debt relative to income ballooned to the highest in three decades, just as the Federal Reserve has begun raising interest rates for the first time since 2006.
bloom.bg/1KaZXpW

****SD: Last week some friends were regaling me with atmospheric tales from their holiday in the Dominican Republic which was spent on a large farm that grew everything from papayas to tobacco. It sounded equal parts serene and relaxing. Then I remembered that farming is hard… Also see U.S. Farmers Reduce Winter-Wheat Planting More Than Forecast

Why the panic selling on Wall Street hasn’t gone nearly far enough
Barbara Kollmeyer – MarketWatch
he shock waves from last week’s worst-ever start to the year for stocks are still rippling through this market. An ominous, unforgettable start for some.
U.S. stocks rallied into the close yesterday to eke out a small gain, after getting jerked around the entire session, but the Russell 2000 RUT, -0.42% temporarily dipped into bear-market territory. Either the market is finding its feet or we’re in the calm before the storm, say analysts.
Where some see the late-day battle to the black for markets as a sign bulls are alive and well, others aren’t as positive. Our chart of the day explains why those moves may be preventing an inevitable capitulation — that massive panic selling needed before what some say will be rock-bottom prices and an opportunity to start buying again.
on.mktw.net/1OonPYX

The Option Queen Newsletter
Options Queen
Although the Chinese markets, Saudi turmoil and North Korean nuclear test have been given credit for last week’s market retreat, there are other factors that are being ignored. We have been warning that a strong US Dollar will have a deflationary effect on the US economy and somewhat negative effects on the middle income earners, companies that depend on exports and corporations that need to borrow money.
bit.ly/1B5Z2pS

How Unhealthy is the Stock Market in 2016?
Kevin Davitt – CBOE Options Hub
After finishing the first full week of trading in 2016, there was nothing to be happy about the stock market. This was the worst start ever in the history of the stock market, and it all points to some more bad behavior on the horizon. With earnings season around the corner, there is nary a stock that is in position to make a move to higher ground. What seems to be ailing the markets that would have this market down so much?
bit.ly/1PUFOJb

Free commissions on closing short “teenys”!
Steve Claussen – OptionsHouse
I am very pleased to announce that OptionsHouse will be waiving its commissions and contract fees on trades which close short options contracts with premiums 10 cents or less. These contracts are called “teenys” by option professional traders.
bit.ly/1PUBBFf

Exchanges

Euronext to add French weekly options
Alice Attwood – Futures & Options World
Pan-European exchange Euronext is set to launch new French weekly equity options contracts on Friday January 29 in a bid to boost trading opportunities in the CAC 40 index.
The exchange will launch weekly expiries on its French CAC 40 index options contracts on January 29. The launch will begin with the introduction of the week two contracts which will expire on Friday February 12, 2016.
Euronext will add four separate contracts and each will have a fixed last day of trading; the first Friday of the month; the second Friday of the month; the fourth Friday of the month; or, when applicable, the fifth Friday of the month.
bit.ly/1PUFp9v

Nasdaq Suspends Currency-Trading Plans While Rivals Race Ahead
John Detrixhe – Bloomberg
Exchange operator says lack of demand led it to halt plans
Nasdaq said to have been among bidders for Hotspot FX and 360T
Nasdaq Inc. has put its foreign-exchange ambitions on hold because of a lack of demand from customers, even as its rivals spent about $1.2 billion last year on platforms to trade the world’s biggest asset class.
bloom.bg/1IZhZk1

Interview: Mint Tower Capital – a hedge fund directly accessing the exchange to get the whole of the European Equity Options
Eurex
Cornelius Müller, Eurex Exchange responsible for Dutch institutionals and Equity Options, spoke with Bart Bijmolen, Head of Sales at Mint Tower Capital, joining Eurex as a participant, about the company’s arbitrage strategies and what made them join Eurex Exchange.
bit.ly/1ULOvXi

WFE Focus
World Federation of Exchanges
CEO Interview: NSE – financing India’s transformation; Education, Education, Education – WFE’s new Working Group; Open Outcry – London Metal Exchange relocates the Ring; WFE’s new vocational video – full-length version is released; Headlines from the Exchanges
bit.ly/1ULLsyr

HKEx Chief Executive Charles Li: Latest Charles Li Direct: Risk Management And Opportunities Under RMB Volatility
Press Release
2016 has barely begun, but so much has happened already in the financial markets. Many friends are distraught at the decline in the value of the Renminbi (RMB) in the last week. They have asked me how they can hedge this currency risk, especially as many people had put their savings in RMB in anticipation of the currency appreciating.
bit.ly/1PUKQVX

SET sees derivatives trading volume jump 87.5% MoM in December 2015
LeapRate
The Stock Exchange of Thailand (SET) has earlier today posted its trading metrics for December 2015 and the full 2015, with derivatives trading volumes delivering a positive piece of news by registering a sharp rise.
bit.ly/1PUDSAo

****SD: Besides simply serving as a benchmark, SET created the SET50 index specifically to help facilitate the issuing of futures and options. Good to see it’s paying off. (Note: the index is down 14% since the end of 2014.)

CBOE, C2 and CFE Trading Schedule for the Martin Luther King, Jr. Holiday
CBOE
CBOE Holdings, Inc. (NASDAQ: CBOE) announced the following trading schedule for Chicago Board Options Exchange (CBOE), C2 Options Exchange (C2) and CBOE Futures Exchange (CFE) in observance of the Martin Luther King, Jr. holiday:
bit.ly/1Q2cJxl

MIAX Options Holiday Schedule
Press Release
Please be advised the MIAX Options Exchange will be closed on Monday, January 18, 2016 in observance of Martin Luther King Jr. Day.

Regulation & Enforcement

China Allows More Central Banks to Enter Onshore Forex Market
Grace Zhu – WSJ
China’s central bank said more foreign central banks have been given the green light to trade in the country’s onshore foreign-exchange market, as part of Beijing’s effort to liberalize its capital account.
The People’s Bank of China said in a statement Tuesday the Reserve Bank of India, Bank of Korea, Monetary Authority of Singapore, Bank Indonesia, Bank of Thailand, Bank for International Settlements and International Finance Corporation will form the second batch of foreign financial institutions entering China’s interbank forex market.
on.wsj.com/1PUJPNI

Technology

S3 Signs Major U.S. Retail Broker to Its Best Execution Analytics Platform
FinanzNachrichten.de
S3 (“the Company”), a financial services software company that provides customized solutions to monitor and analyze trade execution, today announced that is has signed a major U.S.-based retail broker to its best execution analytics software platform, for both equities and options. The customer win represents the ongoing growth of the Company’s client base of retail and bulge bracket banks, institutions, broker-dealers, exchanges, and market makers in addition to retail brokers.
bit.ly/1W39WVk

TriOptima Launches Automated End-to-End Margin Processing Solution
Jeff Patterson – Finance Magnates
TriOptima, an over-the-counter (OTC) derivatives specialist and infrastructure provider, has launched its latest post-trade utility service, triResolve Margin, a newly designed web-based, end-to-end margin processing solution delivered in tandem with AcadiaSoft, according to an ICAP statement.
bit.ly/1PUBw4w

FX: CLS outlines plans for expansion
Euromoney magazine
CLS, the systemically important FX settlement system, has a number of plans in the pipeline, including an initiative with LCH.Clearnet and a settlement system for currencies outside its proprietary system.
bit.ly/1ULSymC

TradeStation and VectorVest Team Up
GlobeNewswire
TradeStation, a Monex Group company (Monex Group, Inc. is listed on the first section of the Tokyo Stock Exchange, code: 8698) and an award-winning broker-dealer and futures commission merchant, announced today that it has teamed up with VectorVest, a stock analysis and portfolio management system. Through the new alliance, VectorVest subscribers who also have a TradeStation brokerage account will be able to execute their trades using TradeStation’s reliable, lightning-fast order execution and price-improvement opportunities.
bit.ly/1PUCEVN

Strategy

VIX January 22 / 30 1 x 2 Call Spread from Monday
Russell Rhoads – VIX Views
Today, while I was teaching at the Options Institute, a roar came up from the VIX pit about an hour into the trading day. Despite the tumultuous market activity that we have experienced to begin the year, the audible volume from the open outcry pits has been fairly tame. What got the guys going today was a very large ratio spread using January VIX Calls that expire on the open next Wednesday.
bit.ly/1JIgpmA

****SD: I get tingles when thinking of open outcry pits roaring these days. *sigh*

China: How Investors Can Play the Market Meltdown
Steven M. Sears – Barron’s
It’s time for China’s regulators to permit exchanges to list options on the Shanghai Shenzhen CSI 300 Index.
If investors could buy puts or sell calls on the primary barometer of Chinese stocks, the selling pressures roiling China’s stock market might abate, and stability might enter a market that seems intent on unraveling.
Puts and calls transfer the risk of stocks to a market that knows how to quantify and hedge that very risk. This relationship between derivatives and stocks helps investors “find the market” when it is overshadowed by economic and financial hobgoblins.
bit.ly/1PUCzBo

Time To Short Volatility Again – iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX)
Seeking Alpha
The broader market is oversold and that creates an opportunity to short volatility as represented by the VXX.
VXX is nearing overbought levels and contango has been reintroduced, setting up a favorable short scenario.
Risk/reward is skewed towards shorting VXX here as all the conditions are in place for a VXX selloff.
bit.ly/1JIm8sw

The Great Benefit of a Falling Stock Market
John Kimelman – Barron’s
When stocks begin to fall hard after a fairly lengthy bull market, it’s somewhat inevitable that a sense of foreboding grips the marketplace and some investment soul-searching will ensue.
In perusing the financial media, a few articles have surfaced in recent days that embrace the spirit of trying to make sense of it all.
These pieces often have a shelf life long beyond impassioned articles about a particular stock that may be oversold right now.
bit.ly/1PUIB5f

Low-Volatility ETFs Tested Early
Brad Zigler – wealthmanagement.com
What better time to launch a low-volatility equity fund than in the midst of the steepest stock selloff in years? I mean, that’s really the way to prove a low-vol concept.
Well, that’s pretty much what’s happened to a three-fund DBI (Diversification-Based Investing) suite from Legg Mason which debuted just before year’s end. DBI, according to Legg Mason’s fund runners, eschews cap-weighted exposure and instead balances portfolios according to thematic country and sector correlations. Or, more properly, discorrelation. The DBI methodology attempts to combat the concentration risk that accompanies and, it’s argued, fosters bubbles by underweighting highly correlated sector and country exposures.
bit.ly/1PUGez8

****SD: Oof!

Education

TT CampusConnect: Growing the Next Generation of Commodity Marketing Professionals at North Dakota State University
William W Wilson and Frayne Olson – Trading Technologies
The job market in agriculture has been particularly robust over the past 5-10 years.¹ This is partly in response to the retrenchment that happened in many companies about 10 years ago along with the evolving demographics of many agricultural firms. There are a multitude of other reasons for this including the escalation in economies of transactions, greater risk, ethanol and energy trading (e.g., oil and electricity) that tends to attract grain traders, and, importantly, a fairly robust view of agriculture by many companies. Indeed, some firms have indicated that their growth is limited only by their inability to hire enough well-qualified individuals.
bit.ly/1PUAu8x

****SD: See the crop story in the lead section.

Why 2016 May Be Even More Volatile Than 2015
Alan Gula – Wall Street Daily
By now, you’ve probably heard that the stock market suffered its worst start to a year in history.
The S&P 500 Index (SPX) declined 6.0% in the first five trading days of the year. Going back to 1957 (year of SPX inception in its 500 company form), the next largest decline was a 5.3% rout in 2008.
Additionally, 2016 has the potential to be far more volatile than 2015. In fact, as shocking as it may be to hear this, 2015 was actually pretty tame.
The CBOE Volatility Index (VIX) did spike above 50 in August. However, the VIX measures implied volatility, which is the market’s estimation of future short-term volatility.
bit.ly/1JIkqYj

Events

Risk Management for a Volatile Market: Prepping for 2016 – Jan 14, 2016, TT’s Tech Tap
Trading Technologies, CBOE Futures Exchange and Advantage Futures are pleased to present this event as a forum to discuss risk challenges and how to manage them for the new year.
Discussion Points:
Understanding the Term Structure of VIX
As Market Participants Vary, So Do Risk Profiles
Futures, Options or ETPs?
Introduction: Drew Shields, CTO – Trading Technologies International, Inc.
Moderator: Jay Caauwe, Managing Director – CBOE Futures Exchange
Panel:
Larry Schulman, CEO,Cheiron Trading LLC, Henry Carter, Head of US Index Trading, IMC
Ari Pine, President of Exchange Connectivity, Trading Technologies, Euan Sinclair, CEO and Co-Founder, FactorWave

Agenda:
3:30pm Registration
4:00pm Panel Discussion
5:00pm Drinks & Network

When
Thursday, January 14, 2016 from 3:30 PM to 6:30 PM (CST)
Where
TT’s Tech Tap – 222 S Riverside Plaza. 11th Floor. Chicago, IL 60606

The event is free to attend but you must register by clicking HERE

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