Observations and Insights

Options – A Must Have in Every Advisers’ Toolbox
Catherine Clay – Livevol, CEO

Yesterday, I wrote about the increase in option volumes from “Mom and Pop” traders. Today I want to note the increased trading volumes originating from independent option advisers.

Before 2004, many advisers did not trade options, saying they were too expensive and complex. But recently, especially after 2008, adviser use has grown tremendously, spurred on by a greater understanding of options, lower transaction costs, tighter bid/ask spreads, and increased ease of execution.  

Risk management, however, seems to be the primary driver for most advisers. That’s what the Options Industry Council (OIC) reported in a recent white paper titled “Tales from the Front.” In its research the OIC interviewed a diverse set of advisers and found that the number-one reason advisers gravitated towards options was risk management. Many of those advisers were disappointed with how many of the “defensive” asset classes performed during 2008/2009, and wanted something more reliable.

Read More >>> http://jlne.ws/LCajqv

Lead Stories

Lehman Brothers Maybe Sold Warren Buffett a Rainbow
Matt Levine – Bloomberg
If you are like me, you will enjoy the heck out of Dan McCrum’s FT Alphaville series (part 1, part 2, part 3) on Berkshire Hathaway’s index put options, but I cannot guarantee that you are like me. I was mildly titillated by his use of the term “negative cross gamma,” if that gives you an idea.
**Lots of speculation by the author. Not $4.5 billion worth of speculation, but quite a bit. -DA

Twitter’s Big Drop Means Big Profits for Some Options Traders
Kaitlyn Kiernan – The Wall Street Journal
Twitter Inc.TWTR -22.21%’s huge drop Thursday is bad news for many shareholders, but for some options traders, it may have meant a tidy 200% profit overnight.
Going into Twitter’s earnings reports, many options traders were bracing for some big moves, placing bets that the stock would rise or fall 15% on the news.
Turns out, the move was even bigger than they expected.

Small-Cap Bears at Highest Since ’12 on Selloff: Options
Inyoung Hwang – Bloomberg
Options traders are the most bearish on small U.S. companies since June 2012 as investors look for safer stocks after the worst selloff in more than a year.

Volatility fears most prevalent in equities
Jamie Chisholm – Financial Times
The US monthly jobs data will be released on Friday.
Analysts’ consensus is for a net 185,000 positions to have been added in January, says Reuters.
The chance of some severe market action following the report’s release may be reduced, however, because investors feel the Federal Reserve will require a fairly astonishing outcome to divert it from its tapering trajectory.

Risk protection back in focus as volatility picks up
The Street
Volatility is creeping back into the market in early 2014 after a long slumber, leaving some investors anxious and unsure about how to prepare for more turbulence.
The CBOE Volatility Index (VIX) has broken above 20 and the S&P 500 (SPX) is down about 6% from its all-time highs as investors fret over emerging market currencies and recent signs of weakness in the U.S. job market.

What equity options are saying about tomorrow’s jobs number
By Andrew Wilkinson – Futures Magazine
When December jobs data was released, stock prices rose marginally despite a disappointing 78,000 reading. And just five days later benchmark indices reached record highs just in time for global slowdown fears to fuel contagion worries causing worrywarts to dump equities. The selling, nevertheless, dried-up earlier in the week, and a glance at the S&P 500 chart shows how investors are taking a chance that the correction is offering them a rich buying opportunity.

A Look at Nine Goldman Trades That Lost Libya $1 Billion in One Year
Maureen Farrell – The Wall Street Journal
Trading under the influence of Goldman Sachs can be dangerous and costly, Libya’s sovereign-investment fund alleged in a lawsuit filed with London’s High Court last week.
Working with advisers from Goldman Sachs, the fund, the Libyan Investment Authority, claims that the bank pushed the fund into $1 billion in “highly speculative gambles” in 2008 that became essentially worthless within less than a year.

HSBC Sees Emerging-Market Currency Rebound as Volatility Abates
Robert Brand and Guy Johnson – Bloomberg
Emerging-market currencies from South Africa’s rand to Turkey’s lira are set to rebound as market volatility decreases, according to David Bloom, global head of currency strategy at HSBC Holdings Plc.

New Year’s revelations for derivatives market
Jonathan Watkins – Future and Options Intelligence
Equity and interest rate derivatives volumes hit record highs in January with trading activity stemming from turmoil in emerging markets, continued US tapering and weak Chinese manufacturing figures.

Buffett’s Derivatives Exposure Uses “Weapons of Mass Destruction”
Mark Melin – ValueWalk
Warren Buffett once famously labeled derivatives “weapons of mass destruction” due to the highly-leveraged nature of the contract structure and its ability to literally destroy the economic foundations of a society. The over the counter (OTC) derivatives exposure is said to be near $600 trillion, capable of wiping out the economic value of the world economy, valued at $72 trillion, several times over.  

EXCLUSIVE – JPMorgan in exclusive talks with Mercuria on commodities sale
Dmitry Zhdannikov – Reuters
Fast-growing trading house Mercuria, led by two former Goldman Sachs (GS.N) executives, has become the front-runner to buy the physical commodities unit of JPMorgan (JPM.N), one of the most powerful oil and metals desks on Wall Street, two sources told Reuters.

Videocast: VIX pits ‘feel different’

U.S. Stock-Tied Note Sales Climb to Four-Year High on Volatility
Kevin Dugan – Bloomberg
Banks in the U.S. sold $3.56 billion of structured notes tied to stocks in January, the most in at least four years, as volatility surged for major equity indexes.
The securities, which included reverse convertibles, made up more than 80 percent of the overall $4.27 billion of volume last month, according to data compiled by Bloomberg. That makes the sales period the biggest since March 2012, when issuance was $4.54 billion.

Nanex’s Hunsader Seeks To ‘Save’ Markets From High-Frequency Trading
Kitco News
It was the “flash crash” of May 2010 that woke Eric Scott Hunsader to the idea that high-frequency trading might have a hand in trading disruptions.
The “flash crash” caused the Dow Jones Industrial Average to fall 9%, but the index recovered those losses within minutes. Since then, there have been other trading glitches, whether they affect individual stocks or exchanges, which market participants blame on high-frequency trading.


Nasdaq CEO Sees Winning SEC Approval for Private Market Soon
Sam Mamudi – Traders Magazine
Nasdaq OMX anticipates winning final approval for its Nasdaq Private Market for closely held companies this month and hopes to open the venue in early March, says CEO Robert Greifeld.

CME Group renews contracts of top two executives
CME Group Inc, the biggest operator of U.S. futures exchanges, on Wednesday extended the contracts of its top two executives, Terry Duffy and Phupinder Gill.

Regulation and Enforcement

Nasdaq chief eyes MiFID II listed derivatives boon
Richard Henderson – The Trade
Europe’s MiFID II rules will create new opportunities for listed derivatives business in the region by increasing competition, Nasdaq CEO Bob Greifeld has said as he discussed strong fourth quarter earnings for the market operator.

U.S. Said Near Deal With EU on Reprieve for Swap-Trade Rules
Silla Brush and Jim Brunsden – Bloomberg
U.S. and European Union officials are nearing a deal to grant EU swap-trading platforms a reprieve from Dodd-Frank Act rules set to take effect next week, according to two people with knowledge of the negotiations.

FINRA to Provide Market Surveillance for BATS Global Exchange
Scott Patterson and Bradley Hope – The Wall Street Journal
Deal Brings FINRA Market Oversight to 99% of Market
WASHINGTON—The Financial Industry Regulatory Authority has signed a deal to take over market surveillance of BATS Global Markets Inc., giving the regulator the ability to track about 99% of all U.S. stock trading for market abuse and other trading problems.


An Expensive Kind Of Insurance
David Merkel – Seeking Alpha
Strategy One: “Consistent Losses, with Occasional Big Gains when the Market is Stressed”
Strategy Two: “Consistent Gains, with Total Wipe-out Risk When Market is Highly Stressed”
How do these two strategies sound to you? Not too appealing? I would agree with that. The second of those strategies was featured in an article at Bloomberg.com recently – Inverse VIX Fund Gets Record Cash on Calm Market Bet.

A VXX Refresher
Adam Warner – Schaeffer’s Investment Research
As strong as the CBOE Volatility Index (INDEXCBOE:VIX) has looked recently, the iPath S&P 500 VIX Short-Term Futures ETN (VXX) has looked even stronger on a relative basis. In a typical day, the VXX should move about 50% of the VIX, but that’s an average number that’s extremely variable.

VXX: Contango and Cash
Steve Smith – Minyanville
Stock market volatility is on the rise, which not only presents trading opportunities in stocks, but in volatility itself.
The recent 6% market decline as sent the VIX (INDEXCBOE:VIX) is up some 30% over past two weeks. I’m using this jump in the VIX to establish two separate positions in the iPath S&P Short-Term VIX (NYSEARCA:VXX): one low-risk long-term, which I’ll look at today, and a riskier short-term one I’ll discuss tomorrow.

Options Education

12 New Months – 12 Solid Rules: Part 2
Rick Wright – The Options Insider
In the first half of the article, I focused on some key elements to get the ball rolling, such as knowing your entries, your targets and reasons for taking a trade in the first place. I would like to keep this guide as practical as possible and in this follow-up second part, let’s waste no time in getting straight to the points:
**I think I may have missed Part 1 which is here: http://jlne.ws/LCbXIC -JB

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