JLN Options: Low stock volatility here to stay for a while: Goldman Sachs; Complacency On Rise As Volatility Falls In Many Markets; Time To Be Worried?; The Death of Volatility?

May 15, 2014

Lead Stories

Low stock volatility here to stay for a while: Goldman Sachs
Wallace Witkowski – MarketWatch
Stocks pulled back Thursday, prompting a spike in the the CBOE Volatility Index, but even with that “jump” volatility is at relatively mild levels, a situation that’s expected to continue for the near future, according to Goldman Sachs.
The VIX VIX jumped 11% to 13.53 Thursday, but is still nowhere near the long-term average of 20.

Complacency On Rise As Volatility Falls In Many Markets; Time To Be Worried?
Kitco News (via Forbes)
With Federal Reserve policy seemingly on autopilot, options volatility in several markets is lower than usual, market watchers said.
Options volatility in gold, silver, some currencies and U.S. Treasurys are low. The Chicago Board Options Exchange volatility exchange index, known as the VIX, shows equities volatility is near record low levels, too.

The Death of Volatility?
Steven Russolillo – The Wall Street Journal
Fear has left the building.
Wall Street’s so-called fear gauge has fallen so far that at least one market watcher wonders if structural, permanent changes have taken place in the market.
Stock-market volatility has tumbled in recent weeks, with the CBOE Volatility Index, the VIX, falling near its lowest level since the beginning of the year. It finished Wednesday at 12.17, down 43% from its high of 21.44 in February.

No Fear? Bond Market Says Think Again
Steven Russolillo – The Wall Street Journal
The stock market has been showing little fear of late, but the bond market is telling a very different story.
Global bond rates sit at their lowest levels of the year, with the yield on the 10-year U.S. Treasury dropping below 2.5% Thursday for the first time since June.

Study Shows ETF Usage on the Rise
John D’Antona Jr. – Traders Magazine
Institutional investors, always on the hunt for alpha and increasing their returns, are looking towards exchange traded funds more and more.
That’s the viewpoint of Greenwich Associates’ most recent market study, which showed institutional investors are using ETFs more in their portfolios and are allocating a greater amount of cash and space to the asset class.

ICAP Launches Its Trans-Atlantic SEF, Regulated by Both CFTC and FCA
Victor Golovtchenko – Forex Magnates
The largest broker responsible for inter bank transactions, ICAP, has unveiled that it is launching its UK regulated Swap Execution Facility (SEF) under its UK subsidiary ICAP Global Derivatives Limited (IGDL). Last week the US Commodity Futures Trading Commission (CFTC) announced that it had granted a temporary SEF permit to IGDL, today ICAP launched its offering, complete with a Financial Conduct Authority FCA license.

Russell 2000 Bounces Out of Correction Territory
Brendan Conway – Barron’s
The Russell 2000 index of smallcap stocks led the market lower this morning, dipping briefly into correction territory, if you define that move as a loss of 10% or more from a recent high.
But the Russell recovered more than half its loss and has closed down by about 0.6% — a smaller fall than the large-company S&P 500 or blue-chip Dow Jones Industrial Average.

Videocast: Bidding up VIX calls

Anticipation in the India VIX Futures Market
Russell Rhoads – CBOE Options Hub
A couple of weeks ago I was talking VIX to a completely new crowd in Delhi, Kolkata, and Mumbai India. The National Stock Exchange of India launched futures trading based on the India VIX (NVIX Futures) recently and I had the opportunity to meet with a wide variety of traders and investors to discuss how volatility futures markets act relative to the corresponding spot volatility index.   My visit was timely for a couple of reasons.


London Stock Exchange Looks to Derivatives as LCH Boosts Results
Nandini Sukumar – Bloomberg Businessweek
London Stock Exchange Group Plc (LSE) will increase its focus on futures to boost growth as LCH.Clearnet Group Ltd., the world’s largest clearinghouse for interest-rate swaps, buoyed its full-year financial results.
The operator of Europe’s oldest independent bourse today said full-year revenue rose 50 percent to 1.09 billion pounds ($1.83 billion), from 726.4 million pounds last year. LCH, which is majority-owned by LSE, contributed 263 million pounds of sales. LSE also said it’s boosting its cost-savings estimate from integrating LCH to 60 million euros ($82.3 million) in 2015 from 23 million euros.

Exchanges to Get Tick-Size Pilot Within Weeks, SEC Official Says
Dave Michaels – Bloomberg
The U.S. Securities and Exchange Commission plans to tell stock exchanges in the next few weeks to implement a program that will test ways of boosting trading in smaller stocks, an agency official said today.
The trading experiment could be used to test other market-structure changes, SEC Trading and Markets Director Stephen Luparello said at a Securities Industry and Financial Markets Association conference in New York. The agency will issue an order to stock exchanges that outlines how the program should work, he said.

ISDA and FIA Europe Publish European Cleared Derivatives Execution Agreement
Press Release (FIA Europe)
The International Swaps and Derivatives Association, Inc. (ISDA)
and FIA Europe today jointly announced the publication of the ISDA/FIA Europe Cleared
Derivatives Execution Agreement for principal-to-principal client clearing.
The ISDA/FIA Europe Cleared Derivatives Execution Agreement is designed to be used as a template for market participants when negotiating execution agreements under English law for swaps that are intended to be cleared by central counterparties located outside of the US.
http://jlne.ws/RGXSx5 (PDF)

Regulation and Enforcement

Firms may leave risk unprotected due to ‘onerous’ derivatives rules
Clare Hutchison – Reuters
Companies will stop managing certain risks and leave themselves unprotected if derivatives trading rules become too onerous and expensive, the head of a trade body representing more than 4,000 corporate treasurers has said.
Derivatives such as currency options are used by companies to limit their exposure to factors such as forex swings, but are being increasingly controlled as regulators look to tighten supervision of previously opaque instruments in the wake of the 2008-2009 financial crisis.

CFTC Reviewing U.S. Banks’ Overseas Trading for Possible Evasion
Silla Brush – Bloomberg
The Commodity Futures Trading Commission is reviewing U.S. banks’ steps to restructure overseas swap trading as part of an examination of whether the companies might be evading Dodd-Frank Act rules.
The agency’s staff is gathering information about any changes banks have made to derivatives contracts or their corporate structures seeking to free themselves from the law’s restrictions, Mark P. Wetjen, the agency’s acting chairman, told reporters yesterday after a Senate hearing in Washington.

Options Education

Trading 101: Getting the Call Right Is Only Half the Battle
Monday-morning-quarterbacking a recent volatility trade
Adam Warner – Schaeffer’s Investment Research
I don’t trade actively anymore, but one play I do like to put on from time to time is to fade something VIX-related when the CBOE Volatility Index (VIX) gets overbought.
I put on just such a trade back in January, and literally just took off the balance of it yesterday. It was a “winner,” but in hindsight it was possibly one of the worst “good” trades I’ve ever done. And that matters. Let me try to explain.


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