Lead Stories

Junk-Bond Anxiety Grows as Traders Buy Up Bearish Puts
Callie Bost and Inyoung Hwang – Bloomberg
U.S. options traders are bracing for more losses in junk bonds.
Demand for protection against declines has pushed the number of outstanding puts on the iShares iBoxx $ High Yield Corporate Bond exchange-traded fund to five for each call, up from a ratio of 1.6 at the start of 2014, data compiled by Bloomberg show. The eight contracts on the fund with the highest ownership are all bearish.

Investors move into cash, bracing for market sell-off
Christopher Whittall – Reuters
The number of investors buying crash protection against a sharp fall in stock markets over the coming months has risen to its highest level since October 2008, according to Bank of America Merrill Lynch’s fund manager survey for August.
Investor cash holdings have also risen sharply over the past month from 4.6% to 5.1% – their highest level since June 2012 – as concerns over geopolitical risk have spiked since the July survey.

In Stock Market, Anxiety Can Be Good Thing
E.S. Browning – The Wall Street Journal
Traders work the floor of the New York Stock Exchange in late April. Getty Images
With stock prices high and the globe unsettled, investors are feeling unusually anxious. Paradoxically, that could be a fine thing for markets, say investment strategists at Bank of America Merrill Lynch.
“When everyone thinks things look bad, that is when you want to buy,” said Savita Subramanian, Merrill’s chief U.S. stock strategist. “It is when everyone is positive that you want to sell.”

Brokerages face exodus as advisers get better deal in indie firms
Elizabeth Dilts – Reuters
The four biggest U.S. brokerage firms are facing an exodus of employees who are finding they can make more money and save on taxes by taking their clients and starting an independent firm before they retire.
Prices are rising for independent brokers because of demand from investors and other firms, while supply is low because advisers have made steady money through a five-year bull market and are waiting to sell. At the same time the major brokerages — Bank of America’s Merrill Lynch, Morgan Stanley, Wells Fargo and UBS — are fighting to keep their money-making assets from walking out the door.

Risk allocation must replace asset allocation
William G. Ferrell – Pensions & Investments
The investment industry has made great strides in using technology to modernize the investment process. The growth of exchange-traded funds is testimony to the desire to increase liquidity and transparency, and lower transaction and management costs. Transaction fees are ever shrinking. Information technology puts market and investment information in managers’ and investors’ hands with lightning speed and laser accuracy. But the most important part of the investment process — portfolio construction and management — is like using a rotary telephone! The asset allocation process is outdated, mired in 20th century thinking in a 21st century world, and — most importantly — fails to address investor needs.

Rising Short Exposures Help Hedge Funds Amid Higher Volatility
According to an eVestment report, hedge funds are outpacing global equity exposures in July, non-directional equity and credit outperform.
July was a volatile month for financial markets with Europe re-emerging as a source of instability, escalating tensions in eastern Ukraine and conflict in the Middle East all weighing on investor preference for risk assets. In this environment, aggregate hedge fund performance was negative 0.35%, the industry’s fourth down month of 2014. The losses dropped year-to-date returns to 2.62%.

ISDA Research Study – Dispelling Myths: End-User Activity in OTC Derivatives
Automated Trader
There is a perception among some commentators that only a small fraction of derivatives activity relates to hedging that benefits the ‘real economy’. This analysis from ISDA challenges that assumption. Publicly available data published by the Bank for International Settlements reveals that 65% of over-the-counter interest rate derivatives market turnover involves an end user on one side and a reporting dealer on the other. These participants, comprising non- dealer financial institutions and non-financial customers, use derivatives primarily to hedge risks and reduce volatility on their balance sheets.

Videocast: VIX hammered below 13

Stocks, volatility fall in calm session
Chris McKhann – optionMONSTER
Stocks and volatility both eased lower yesterday in a quiet summer session.
The S&P 500 fell 3.17 to 1933.75, closing on top of its 10-day moving average. Nonetheless, the index remains below the 20-day. It has resistance at 1960 and support at 1910.
The Nasdaq 100 slipped 5.23 to 3905.22, ending the day less than one point from where it opened. It also finished above its 10 day moving average and below the 20-day. Resistance is at 3950 and support is found at 3850.


CME Group to Launch Eurodollar Bundle Futures and Options
Press Release (CME Group)
CME Group, the world’s leading and most diverse derivatives marketplace, today announced expanded access to its CME Eurodollar liquidity pool by offering Bundle futures and options on Bundle futures. Contracts will be available starting September 22, 2014, pending CFTC review.  
The new contracts will complement the existing suite of Eurodollar contracts and Eurodollar Packs and Bundles.  Introduced in 1994, the Eurodollar Bundle enables the simultaneous sale or purchase of one each of a series of consecutive Eurodollar contracts, leaving the user with a strip of individual Eurodollar futures positions. The new Bundle futures provide the same economic exposure, through a single line item instead of a strip of contracts.  Bundle futures and options will be available through the CME Globex electronic trading platform, open outcry, and block trading, and will be available in 2-year, 3-year and 5-year tenors.

CME’s Sprague Warns About Failure to Settle Clearing Impasse
Traders Magazine
The turf war among regulators in the U.S. and Europe in the area of clearing of over-the-counter (OTC) derivatives has made central counterparties (CCPs) in those countries nervous about a mid-December deadline to reach regulatory equivalence. Among those CCPs is Chicago-based CME Clearing, which clears a large portion of euro/dollar interest rate swaps, and worries the industry could be impacted if an agreement isn’t reached.

Regulation and Enforcement

Barclays Seen Facing $2 Billion in Misconduct Costs
Stephen Morris – Bloomberg
Barclays Plc (BARC) faces costs of as much as 1.2 billion pounds ($2 billion) for its alleged rigging of currency markets, lying to clients about its U.S. dark pool and mis-selling interest-rate swaps, Sanford C. Bernstein Ltd. said.
The U.K.’s second-largest lender may incur a 700 million-pound charge to settle a foreign-exchange probe with regulators and a further 200 million pounds relating to a U.S. investigation into its private-trading venue, Chirantan Barua, an analyst at Bernstein in London, said in a note today. The bank could reach settlements by the end of 2014, he said.


SuperDerivatives goes live with exotic options trading venue
Farah Khalique – Euromoney Magazine
SuperDerivatives has gone live with a new trading platform to trade exotic foreign-exchange options electronically, and plans to expand the number of tradable asset classes from metals and FX to include oil, equity derivatives, credit and interest rates.
The derivatives specialist has ambitious plans to modernize the way exotic FX options are traded on its new platform, SDeX, but is the market ready to trade such complex structures electronically?


How to Invest in Amazon
Steven M. Sears, Barron’s
Many investors are worried that Amazon’s lack of profits, rather than its great scope, is finally defining the stock.
Amazon.com (ticker: AMZN ) is almost 20% below its 52-week high after revealing disappointing earnings and guidance in late July. For years, Wall Street has given Amazon a pass to operate with little or no profits, but investors may be starting to get antsy.

Can volatility ETFs protect against a market crash?
Investors Chronicle
The VIX index, which demonstrates the market’s expectation of 30-day volatility, has been rather flat since 2011, so private and professional investors alike think that a rockier period may be due.
The Investors Chronicle recently reported that because of this, professional investors are taking profits from stock market investments, and increasing the cash element of their clients’s portfolios as a “safe house” instead. They say opportunities in the equity and bond markets in recent months have become so scarce that it is now safer to keep a significant proportion of assets in cash, and a number of wealth managers and multi-asset funds managers have swapped 10 per cent of their clients’ investments for cash or cash alternatives such as money-market funds.

Strategy To YieldBoost CBOE Holdings From 1.7% To 4.7% Using Options
Shareholders of CBOE Holdings CBOE +0.32% Inc. (NASD: CBOE) looking to boost their income beyond the stock’s 1.7% annualized dividend yield can sell the January 2016 covered call at the $59.50 strike and collect the premium based on the $2.20 bid, which annualizes to an additional 3% rate of return against the current stock price (at Stock Options Channel we call this the YieldBoost), for a total of 4.7% annualized rate in the scenario where the stock is not called away.


CBOE Risk Management Europe Conference Draws Near
Marty Kearney – CBOE Options Hub
CBOE’s Risk Management Conference (RMC)  Europe is returning to The Powerscourt Hotel, County Wicklow, Ireland.   It will be held from Wednesday September 3rd to Friday September 5th.  2014.   Participants in 2012 had glowing comments on the beauty of the world famous Powerscourt Hotel, the hospitality of the Irish and the proximity and ease of travel to Dublin, Ireland, only 25 K away.  This year’s conference has drawn tremendous interest.

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