JLN Options: Last dance for options trading strategy around dividends; Volatility Soars as Bank of Japan Influence Spreads; Traders Seek Answers After Draghi Fueled October Swings

Nov 6, 2014

Observations and Insight

Hugh Vyvyan, Saracens Rugby Team – Transitions: Lessons on a career change
JohnLothianNews.com

“You have to work incredibly hard to survive. That’s a fact of being a rugby player, and that’s a fact of life.”

Hugh Vyvyan, former player of the Saracens Rugby Team, discusses the importance of working as a team and what individuals need to do to better both themselves while contributing to their group, whether it be a sports team or financial firm. Vyvyan uses his own personal experiences with the Saracens team to illustrate how successful organizations focus more on its people rather than being driven by achieving results. Vyvyan noted how the Saracens organization did a complete overhaul on its philosophies by taking better care of its players and getting them to buy into a system where everyone contributes, whether or not their contributions were noticed during every game. However, all this begins with the individual. Hard work, making oneself well-rounded and becoming focused on the team first is what drives organizations to be great for years to come.

Watch the video »

Lead Stories

Last dance for options trading strategy around dividends
Saqib Iqbal Ahmed – Reuters
Options dealers looking to snag the coming dividend payment on Apple Inc’s (AAPL.O) shares sent the iPhone maker’s call volume to a record on Wednesday, but new options market rules mean this may be their last chance for such a strategy.
Large market makers have long used a dividend-linked options trading strategy to make easy money by taking advantage of a hole in the Options Clearing Corporation’s rules on clearing trades. New rules set to take effect later this month will close that loophole.
http://jlne.ws/1tNcCuq
***DA: Easy come, easy go.

Volatility Soars as Bank of Japan Influence Spreads
Kevin Buckland – Bloomberg
Traders raised their outlook for currency price swings to the highest in more than a year as an unexpected stimulus boost from the Bank of Japan roiled financial markets.
Deutsche Bank AG’s Currency Volatility Index climbed to 8.62 percent yesterday, the highest close since September 2013, from 7.12 percent on Oct. 30. That’s the day before BOJ Governor Haruhiko Kuroda increased the annual target for expanding the monetary base to 80 trillion yen ($697 billion). The gauge was at a record low of 4.93 percent as recently as July 21. Volume on ICAP Plc (IAP)’s EBS trading platform jumped to the highest this year after the BOJ meeting.
http://jlne.ws/1z2GFyx
***DA: Yen volatility is still well below its long term historical average though.

Traders Seek Answers After Draghi Fueled October Swings
Sofia Horta, Bloomberg
With volatility easing in Europe, another session with Mario Draghi probably wasn’t the first thing stock investors wanted on their calendars this week.
Equity swings exploded and lenders slumped after last month’s European Central Bank conference as Draghi failed to convince investors that he had a strategy to avoid deflation. They won’t get much more clarity tomorrow, according to Goldman Sachs Group Inc., which predicted in a note last week that Draghi will appeal for time to let his policies work.
http://jlne.ws/10ZDixh
***DA: Translation: we do not have the political support for more stimulus at this time.

Analyst Sees ‘Dangerous Scene’ for Markets as Others Yawn
Michael P. Regan – Bloomberg
For sure, the consensus among many market pundits after last night’s election results is that there’s no reason for alarm. And the early moves higher in stock prices reinforce that.
Republicans taking control of both houses of Congress represents a shift in the balance of power, “but it is a modest shift,” is how Bob Doll, chief equity strategist at Nuveen Asset Management LLC, described it.
http://jlne.ws/1tN9xdQ

Europe attracted by US derivatives pull
Philip Stafford – Financial Times
European derivatives trading has had a distinctly American flavour in recent months.
Earnings reports from CME Group, the world’s largest futures exchange, and Intercontinental Exchange, its close rival, have shown a rise in both interest rates trading and credit default swaps (CDS) clearing to the US from the old continent.
http://jlne.ws/1qsdqja
***SR: I think he means ‘a distinctly American flavor.’  

Why the VIX Shrugged Off Midterms
Adam Warner – Schaeffer’s Investment Research
There was virtually no bid-up in options prices ahead of Tuesday’s midterm elections.
So, who was the big winner in October? Probably the Chicago Board Options Exchange
http://jlne.ws/1tNfasz
***SR: Most definitely

EU Nations Remain Divided on Financial Transactions Tax
Viktoria Dendrinou And Gabriele Steinhauser – WSJ
A wide gap remained between European countries that have pledged to start taxing some financial transactions by 2016, as a year-end deadline to reach a deal on the levy looms.
Eleven of the 28 European Union countries–including France, Germany, Italy and Spain–agreed to push ahead with a planned tax on share and derivative trades, after discussions for an EU-wide financial-transaction tax broke down in 2012.
http://jlne.ws/1tNebZp

A Pimco Bet on China Debt, Via Credit-Default Swaps
Anjani Trivedi – Dow Jones Business News (via NASDAQ)
In the months before Pacific Investment Management Co. founder Bill Gross quit in September, the firm had increased its bullish bets on the Chinese economy.
The Newport Beach, Calif., money manager doubled down on its position in the second quarter by selling insurance- like contracts to investors that pay out when a country or a company defaults on its debts, essentially wagering that China would continue at its strong pace of economic growth.
http://jlne.ws/1tNdb7t

Exchanges

JPMorgan Spars With CME Over $375 Million
Matthew Leising – BloombergBusinessweek
JPMorgan Chase & Co. is locked in a debate with CME Group Inc. (CME:US) over whether the owner of the world’s biggest futures market is setting aside enough money to safeguard trades.
The dispute, highlighted this week at the Futures Industry Association conference in Chicago, is over the $375 million of its own money that CME has pledged in case a member defaults. If JPMorgan, one of the largest derivatives dealers in the world, had its way, CME’s “skin in the game” would almost double to $687 million.
http://jlne.ws/1tN8QkG

CBOE Futures Exchange To Launch CBOE/CBOT 10-Year U.S. Treasury Note Volatility Index Futures Next Week
– VXTYN Futures Can Provide Hedge Against Interest Rate Volatility
CHICAGO, Nov. 6, 2014 /PRNewswire/ — CBOE Futures Exchange (CFE) confirmed today that it will launch futures trading on the CBOE/CBOT 10-year U.S. Treasury Note Volatility IndexSM (ticker symbol: VXTYN) next week, on Thursday, November 13, 2014.
CBOE Futures Exchange (CFE) logo.
Futures on the VXTYN Index offer customers a way to hedge pure interest rate volatility risk based on U.S. government debt with a single product for the first time. The VXTYN Index, on which futures on VXTYN are based, is calculated by applying the CBOE Volatility Index (VIX Index) methodology to futures options data from CME Group’s 10-year U.S. Treasury note contract — one of CME Group’s most actively traded interest rate options products.
http://jlne.ws/10ZCDvH

Eurex reports record trading levels for volatility derivatives in October
Hedgeweek
The existing peak – set in March 2014 – was exceeded in October with a total of 1,494,829 contracts traded. The average daily volume was 64,993 contracts in October, an increase of 78 per cent compared with January to September 2014.


Turnover in VSTOXX futures was a major contributor to the new record; these traded almost one million contracts in October (997,946 contracts), representing an increase of 87 per cent compared with October 2013. VSTOXX options showed a similarly positive performance, with a monthly total of 496,883 contracts traded – also a new all-time high.


http://jlne.ws/1tNdT4J
***SR: CBOE wasn’t the only winner in October.

Regulation and Enforcement

CFTC reviews Treasury futures activity on high-volume day
Reuters
The U.S. Commodity Futures Trading Commission found no “break in liquidity” after examining moves in the Treasury futures market during heavy trading on Oct. 15, Chairman Timothy Massad said on Wednesday.
“There was a bit of a price hike and then drop that we took a look at,” Massad told reporters on the sidelines of an annual Futures Industry Association conference in Chicago.
http://jlne.ws/1tN9oah

U.S. CFTC pushes back electronic trading mandates for some swaps
Karen Brettell – Reuters
The Commodity Futures Trading Commission will push back a deadline to require that more swaps trade on electronic trading platforms, to give market participants more time to prepare, the agency’s chairman said on Wednesday.
http://jlne.ws/1tNboPL

CFTC is so underfunded that it cannot evolve to handle Bitcoin and modern electronic markets says Chairman Massad
Andrew Saks-McLeod – LeapRate
With the electronic trading activities at exchanges and clearing houses at the heart of cutting edge technology, and new phenomena such as Bitcoin entering the financial system, CFTC senior officials show concern that the regulators are unable to keep pace with the use, and misuse, of technology
http://jlne.ws/1tNa2EX
***SR: Not to mention prosecuting fraud and preventing the next financial crisis.

BATS Near Settlement, Hyundai-Kia, U.K. Banks: Compliance
Carla Main – BloombergBusinessweek
BATS Global Markets Inc. is close to settling with U.S. regulators over accusations that Direct Edge, the stock exchange operator it bought in January, gave unfair advantages to high-frequency traders, according to a person familiar with the matter.
http://jlne.ws/1tN9MWm

Fed Said to Seek More Time to Mull Actions on FX Traders
Suzi Ring and Jesse Hamilton – Bloomberg
The Federal Reserve asked some currency traders under investigation for foreign-exchange manipulation to waive the deadline for civil actions against them, according to two people with knowledge of the situation.
The Fed sent the requests, known as tolling agreements, to at least two individuals in recent months, said the people, who asked not to be identified because the letters are private. The agreements would suspend the statute of limitations, usually five or ten years depending on the relevant law, which isn’t clear as no accusations have been made yet.
http://jlne.ws/1z2GO4N

Strategy

3 Ways to Trade Gold Now
Steven M. Sears – Barrons
Goldbugs, like ideologues and passionate lovers, possess extraordinary convictions. They need them now more than they have in decades. The yellow metal is undergoing a powerful decline that will challenge their beliefs in ways many goldbugs have never experienced.
http://jlne.ws/1tNcQ4O

Coming to Terms with Options Trading and its Higher Moments
Larry Shover – Fox Business
Gamblers commonly think in terms of hot and cold streaks: Of having a lucky run, of probability pointing to a sudden and likely success at the tables or slot machines because they’ve been losing lately, or because they have been winning lately, or because today is Thursday, or because today is November 6 and 6 is the gambler’s lucky number.
Casino operators gain from gamblers’ irrationality. They know wheels and dice and decks of cards have no memory. Every wager has the same statistical probability of success as the previous attempt. The only predictable outcome is that 98% of gamblers will leave the casino with less money than when they walked in.
http://jlne.ws/1tNe4wM

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