Observations & Insight

Bits & Pieces
Spencer Doar – JLN

A few miscellaneous notes for today. TABB Group’s Options Liquidity Matrix is out for July — no surprise that volumes reflected the summer vacation mentality.

Yesterday, TABB released the results of another study worthy of note — of surveyed derivatives firms, some 44 percent said they would be changing their trading technology by 2018. That’s not too far in the future. With all the chatter about disruptive innovation at conferences and in the media, it’s nice to see a number put on demand for new technologies and that the trading corner of the fintech space has plenty of room for its offerings. Intrenched tech incumbents best shake off any and all air of complacency.

Elsewhere, there is plenty to digest in today’s newsletter regarding the calm in the markets, or, more accurately, questions regarding when the waters will get choppy again.

Oh, and see Best Buy’s action today? A surprising earnings beat has the stock up more than 18 percent. My Best Buy shopping heyday was more than a decade ago. I guess it is doing just enough to keep Amazon at bay.


Lead Stories

Listed Options Volume Falls to 14-Month Low in July
Tabb Forum
US listed options volume fell to a 14-month low in July as domestic stocks’ post-Brexit recovery reduced investors’ appetite for hedges. Options volume in the month totaled 308.9 million contracts, 16% lower than June’s volume and 19% below the year-ago July.
The S&P 500 Index rose 3.6% in July and closed at fresh record highs during the month for the first time since May 2015. The CBOE VIX Index fell 24% in the month, closing as high as 15.58 on July 5 and as low as 11.77 on July 20.

The market is about to get a serious ‘shock’
Bob Bryan – Business Insider
Markets are quiet — really quiet. For 31 straight days, the S&P 500 has not moved 1% or more in either direction, and volatility in the market, as measured by the VIX, has declined sharply since spiking after the UK’s vote in late June to leave the European Union. The quiet summer is keeping investors complacent, according to Athanasios Vamvakidis, Adarsh Sinha, and Yang Chen at Bank of America Merrill Lynch. The complacency is leaving investors seriously exposed, the foreign exchange and rates strategists said.

****SD: Speaking of the lack of activity, see CNBC’s Markets are quiet after the second-lowest daily volume of the year. Want some more noise on the silence? Take a look at the WSJ’s It’s Getting Scarily Quiet in the Stock Market

Oil prices surge as hedge funds reduce short positions
John Kemp – Reuters
Hedge funds executed one of the fastest U-turns on record this month as managers turned from super-bearish to cautiously bullish about the outlook for oil prices. Hedge funds and other money managers increased their net long position in the three main Brent and WTI futures and options contracts by 118 million barrels in the week to Aug. 16.

The eerie calm of the Swiss franc after Brexit
Ralph Atkins – Financial Times
Safe, but still vulnerable to aftershocks, Switzerland is a good place to watch financial market earthquakes such as the UK vote to quit the EU. Much of the wealth of the world’s richest families and entrepreneurs is channelled by banks in Zürich and Geneva. The Swiss franc — a “haven” currency — acts as a gauge of global investor nervousness. At the tensest moments of the post-2007 global and eurozone crises, the currency appreciated sharply, except between September 2011 and January last year, when its value against the euro was capped by the Swiss National Bank.

****SD: Meanwhile, the thing I find eerie about the Swiss franc, specifically the 10 franc note, is the intimidating headmaster-about-to-cane-a-student look on architect Le Corbusier’s face.

Traders Accumulate Bearish Yuan Wagers on Low Costs, Fed Outlook
Currency’s risk reversal increases from an almost two-year low; Such bets aren’t wise as PBOC can support rate, analyst says
Options traders are adding to bearish wagers on the yuan after the cost of betting against the Chinese currency fell to an almost two-year low.

***SD: For info on the yen’s current standing see Bloomberg’s Yen Traders on Edge Before Simultaneous BOJ, Fed Meetings: Chart

Volatility index has one of its biggest one-day gains since Brexit
Fred Imbert – CNBC
The stock market’s “fear gauge” posted one of its best trading days since the United Kingdom voted to leave the European Union. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 8.2 percent, or 0.93 points, to close at 12.27. in intraday trading, the index was on track to notch its biggest one-day gain since June 24, the day after the vote. But the VIX is still holding at near two-year lows.

****SD: Still around yesterday’s closing level. Yawn.

What are the Dog Days of Summer?
Todd Rich – OptionsHouse
We hear the phrase “The Dog Days of Summer” and it conjures up images of sultry summer days where everyone “lays around like a dog” trying to survive the hot and humid temperatures. While that may (or may not) be true, the origins of the saying really refer to the fact that the Dog Star (Sirius) is rising through the summer sky during this period.

Is Yellen about to demote the Fed?
John J Hardy – TradingFloor
The media’s longstanding obsession with the likelihood and timing of the next Federal Reserve interest rate hike has long turned stale as it has devolved into a question of whether the Fed hikes once over the next 12-18 months or not at all.


July Options Complex Overview
CME Group
Offering more flexibility (strike, duration, exercise style) and precision, options on futures allow market participants to better customize their risk management strategies to their specific needs.

****SD: This slipped through the cracks earlier this month.

SMEs concerned by LSE-DB merger
John Bakie – Global Custodian
Small businesses have raised concerns about impact on smaller countries of the proposed merger between Deutsche Boerse (DB) and the London Stock Exchange Group (LSEG).
Michaël van Straalen, chairman of Dutch SME association MKB-Nederland, said the combined entity would be roughly 10 times as large as its nearest rival, Euronext, which would have an adverse effect on activity taking place in markets not covered by the LSEG and DB exchanges.

SGX And Baltic Exchange: Update On Proposed
Press Release
Singapore Exchange Limited (SGX) and The Baltic Exchange Limited (Baltic Exchange) are pleased to announce that they have agreed on the terms for a recommended offer by SGX for the entire issued share capital of the Baltic Exchange (Proposed Acquisition). Yesterday’s announcement follows a period of extensive consultation with Baltic Exchange shareholders and other stakeholders.

****SD: Headquarters of the Baltic Exchange are to remain in London, fyi.

Regulation & Enforcement

SEC clears Pikesville man of fraud charges
Sarah Gantz – Baltimore Sun
Reversing a ruling by one of its own judges, the U.S. Securities and Exchange Commission has cleared a Pikesville man of charges he participated in a short-selling scheme with the online brokerage optionsXpress. In an administrative case brought in 2012 by the SEC’s enforcement division, a judge ruled in 2013 that Jonathan Feldman, a former senior vice president at Eastern Savings Bank, violated SEC rules and committed fraud by engaging in so-called “abusive naked” short-selling. The SEC accused optionsXpress, now owned by Charles Schwab, of helping him sell shares of stock he did not borrow first and had no intention of closing out as required under SEC rules.

****SD: This is probably the least negative use of the phrase “abusive naked” you will ever see.


Regulation to drive tech sales by 2018 – report
Julie Aelbrecht – FOW
Some 51.2% of firms in the survey listed regulatory complexity as chief challenge
Nearly a half of derivatives firms plan to buy new trading software in the next two years to help them deal with increased regulatory complexity, according to a new poll of leading traders. Some 44% of the firms that responded to the Tabb Group survey said they will implement a new trading technology by 2018. Within this group, 15.5% of these firms said they will be deploying a new derivatives trading platform by the end of this year while a half of firms said they had no plans for a new platform.

Derivatives Trading Complexity Quickly Making Technology Obsolete
Tom Lehrkinder – TABB Forum
The tools derivatives traders typically have at hand are quickly becoming obsolete, even as adapting to regulatory and market structure shifts in near real time has become a growing priority. Firms must decide whether to build, buy or deploy a hybrid solution to meet all of their users’ needs.

Want to Trade Like a Pro? This App Can Trigger Your Next Move
Don’t have time to watch the stock market, but don’t want to lose money? There’s an app for that. Technology company TradeIt has teamed with the providers of mobile app Trigger on a service that sends notices to retail investors based on conditional if-then statements about the performance of specific equities, allowing in-app purchases and sales.
****SD: This app does not currently support options, but given the phrasing used in their FAQ section and the number of brokers they connect with that offer robust options trading, I would not be surprised if TradeIt adds options later.


What Does A Widening VSTOXX/VIX Spread Mean To The Underlying Equity Markets?
Mark Shore – Seeking Alpha
Over the past week the VSTOXX / VIX spread narrowed and then widened as the EURO STOXX 50 Index declined. A one and two standard deviation move would price the spread between 8.8 and 12.5. As a sentiment indicator could an overbought VSTOXX / VIX spread imply at least short-term support in the EURO STOXX 50 Index & the S&P 500?

Here’s the Smart Trade As Emerging Markets Soar
Steven M. Sears – Barron’s
Pros turn cautious as individuals rush into emerging-markets stocks; Buy EEM calls instead of the ETF
While emerging markets equities are touted as ways to participate in growth on younger, more vigorous economies, they are also plays on easy U.S. financial conditions. When U.S. interest rates are low and the dollar is softening, American investors flock to markets from China to Indonesia as well as Brazil. So far this year, this trade has worked like a charm.

Weekly Market Outlook – Tug Of War Continues
Price Headley – CBOE Options Hub
For the second week in a row, stocks were content to simply drift sideways…. the result of opposing factors simultaneously weighing on investors’ mind. From one direction stocks are being buoyed by low interest rates that could linger for a while, while from the other direction the market’s high valuations may be keeping a lid on things. The bulls are technically winning the war, but it’s a marginal victory and the tide could turn quite easily.

VIX Shorts Near Extremes: Time To Protect Your Investments?
Michael Lebowitz – See It Market
In our latest research article “Market Complacency Ruling The Day Into U.S. Election” we highlighted that complacency in the stock market, as measured by the VIX Volatility Index, is at levels rarely seen. On its own this is not breaking news, but it is very strange when contrasted with the palpable concerns over the coming presidential election. In additions, we have more general market risks such as weak economic growth, extreme stock market valuations, corporate earnings recession and various geopolitical worries. We ended that article discussing the employment of equity insurance. And further, how insurance is relatively cheap in the context of a riskier profile for equities markets.

In Market Going Nowhere, Traders Renew Love Affair With Momentum
Joseph Ciolli – Bloomberg
What do you do when volatility dissipates and the stock market gets mired in its sleepiest stretch since before the internet bubble? Buy momentum, of course.

****SD: Momentum is gaining momentum.

EpiPen Drama Draws Option Bears to Mylan NV
Schaeffer’s Research
Drugmaker Mylan NV (NASDAQ:MYL) is sinking today, as the company’s EpiPen comes under fire from U.S. senators. More specifically, lawmakers are asking Mylan to explain a sharp increase in the product’s price in recent years — making it the latest biotech to be accused of price-gouging. Senate members have also made a request for the Federal Trade Commission (FTC) to investigate whether the drug company took steps to prevent competition in the market. Meanwhile, MYL stock is down 3.8% at $46.10, and options volume is soaring.

****SD: Difficult consumer sentiment environment for any drug manufacturer to raise prices. I’d be buying puts on MYL simply on principle as I need to get new EpiPens in the next few months. Maybe I could make up the change in the drug’s price on the trade…


Weekend Review – VIX Futures and Options – 8/21/2016
Russell Rhoads – VIX Views
VIX dropped a little as the equity market did a whole lot of nothing last week. We retired the August contract on the open Wednesday morning and September took over as the front month. With time to go to expiration (this is actually a five-week cycle) everyone seemed to notice the steep contango again. What is interesting below is the behavior of the curve beyond October. November and beyond gained a little ground despite all the contracts moving up in the pecking order of expirations.

Weekend Review – Volatility Indexes and ETPs – 8/21/2016
Russell Rhoads – VIX Views
For the second week in a row the S&P 500 Index related volatility indexes hardly budged. Three out of four were lower with the longest dated, VXMT, up slightly on the week.


Gold and Gemstones Pile Up in Singapore Vault on Quest for Haven
Ranjeetha Pakiam – Bloomberg
Precious metals, stones hoarded on negative rates, uncertainty; Investors seeking ‘tangible assets’ to diversify portfolio
The stash of gold, silver and gems stored in the vaults and safe deposit boxes of Malca-Amit in Singapore has jumped almost 90 percent in the past year as wealthy investors seek a refuge in a world of negative interest rates, stagnating economies and political uncertainty.

****SD: Little options relation. I just like the idea of a Scrooge McDuck-esque vault full of jewels.

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