More Costly Protection Seen in S&P 500 Options: Chart of the Day
By David Wilson, Bloomberg Businessweek
Investors are paying up for protection against a drop in U.S. stocks as they never have before, judging by the performance of an option-based indicator.
The CHART OF THE DAY displays the Chicago Board Options Exchange’s SKEW Index, calculated from the cost of bearish put options on the Standard & Poor’s 500 Index relative to bullish call contracts. The SKEW is typically between 100 and 150, and higher numbers show a greater perceived risk of a market drop. The S&P 500 is also shown in the chart for reference.
Volatility buyer emerges
Andrew Wilkinson, Futures Magazine
The CBOE Vix index has returned to unchanged at 11.82 Tuesday as nerves steady in the benchmarks. The S&P 500 index is still lower by 3.57 points, or 0.18%, yet well off its earlier lows.
It appears one investor paid 51 cents to lock into the prevailing low rate of volatility by buying 40,000 call spreads. The value of a call option on the Vix may rise in the event that volatility picks up. This investor looked beyond the summer to purchase the sizable chunk of protection by targeting the September 16/21 call spread.
Did Yellen inspire bearish Emerging Markets options trade?
Andrew Wilkinson – Interactive Brokers
A 200,000 contract bearish put spread appeared in an emerging market ETF in the aftermath of the release of Janet Yellen’s semi-annual testimony to Congress. In it, the Fed Chairman further hedged just about any outcome for the US economy, which she said still needs time to complete its recovery. Ms. Yellen pointed out potential strains in valuation measures across riskier corporate bonds, where yields have compressed to lower risk corporates and government issues.
Derivatives World China: The International Options Forum
16 September, Shangri-La, Dalian, China
With options set for launch in China this year, now is the time to find out how you can take advantage of this once in a lifetime opportunity to be there at the start of the market.
Join over 300 key figures from the global futures and options markets for high level discussions on the latest developments, opportunities, challenges and future direction of the options market in China and around the world.
To view the agenda, click HERE
To register for the event, click HERE
Japan Leads Global Volatility Decline to Seven-Year Low
Jonathan Burgos – Bloomberg
Across global stock markets, nowhere is calm descending faster than in Japan.
The Nikkei Stock Average Volatility Index, which tracks the cost of options on the Nikkei 225 (NKY) Stock Average, tumbled 33 percent this year to 15.3 yesterday, the steepest decline among similar gauges tracked by Bloomberg worldwide. The measure touched 15.1 on July 8, the lowest in seven years. It climbed 4.5 percent last week, compared with surges of 17 percent on the benchmark U.S. volatility index and 25 percent in Europe.
Option compression and complacency risk
Ronald M. George and William J. Taylor – Futures Magazine
“Success breeds complacency. Complacency breeds failure. Only the paranoid survive,” says Andy Grove. Maybe we’re paranoid and maybe we’re like Grove, longtime chairman of Intel, who believes that having fear of what can go wrong today is paramount to staying solvent. In the business of risk management, knowing the math always trumps ignorance of it in terms of preparation and seeking opportunities. As we have indicated in several previous articles, ignoring the math breeds complacency; avoiding the math breeds failure, perhaps catastrophic failure.
How are covered call funds faring in a low volatility environment?
Dan Jones – Investment Week
Managers have said the low volatility seen in financial markets is not restricting their ability to boost yields by writing call options, despite lower strike prices.
Despite a small uptick last week, amid concern over the stability of Portugal’s largest listed bank, market volatility remains near pre-crisis lows.
S&P 500 Falls as Fed Valuation Concerns Overshadow Banks
Lu Wang and Jacob Barach – Bloomberg
The Standard & Poor’s 500 Index fell, following yesterday’s rebound, as Federal Reserve concerns about valuations among social-media and biotech companies overshadowed better-than-estimated bank earnings.
The Dow Jones Internet Composite Index slumped 0.7 percent and the Nasdaq Biotechnology Index lost 2.3 percent. Lorillard Inc. dropped 11 percent after Reynolds American Inc. reached agreement to buy its rival for $27.4 billion including debt. JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. rose after the banks reported better-than-forecast earnings.
Viewing the VIX Through a Contrarian Lens | Trading Floor Blog
Adam Warner – Schaeffer’s Investment Research
Maybe sentiment in the options world is worth more than I thought. Bloomberg Businessweek had this to say yesterday:
Leuthold Group’s Ramsey Sees ‘Dumb Money’ Sell Sign for Stocks
Michael P. Regan – Bloomberg
Doug Ramsey, chief investment officer for Leuthold Group Llc in Minneapolis, has a more nuanced way to spot the difference. And the way he looks at it, the divergence between the two is flashing an “unequivocal stock market negative for the next several weeks.”
Ramsey considers traders of options in the Standard & Poor’s 100 Index to be the “smart money.” On the other hand, the habits of the “dumb money” set can be seen in composite trading volumes in all equity options on the Chicago Board Options Exchange.
FX trading platform EBS starts to fight back with new products
Clare Hutchison – The Globe and Mail
Currency trading business EBS aims to launch a clutch of new products by next April, its chief executive said, seeking a broader client base to counter falling trading volumes and the emergence of increased competition.
The planned transformation of EBS, owned by the world’s largest inter-dealer broker ICAP, comes as the sector faces greater regulatory scrutiny after alleged manipulation of foreign exchange benchmarks used to price trillions of dollars of investments and company deals.
Ask Matt: Are investors too optimistic?
Matt Krantz, USA Today
Q: Are investors getting too optimistic about stocks?
A: Warren Buffett often tells investors to be greedy when others are scared and be scared when others are being greedy.
And with the stock market on a multi-year tear, you’re right to be wondering if investors are perhaps getting a bit too cavalier about stocks.
Summer C-Level Series: Terry Duffy, CME Group
What have been the major themes of your business so far this year?
The major themes of our business so far in 2014 have been focused on growing our core business and expanding the reach of our products. We continue to push into new markets and develop new solutions that help our customers reach their risk-management goals.
One major milestone so far this year was that we launched our London-based exchange, CME Europe, which enables us to better serve our global customer base in that region.
DGCX plans to launch emerging market currency products
The Hindu Business Line
The Dubai Gold and Commodities Exchange (DGCX) has said it plans to launch a wide range of Emerging Market (EM) currency products, targeted at West Asian customers.
In the pipeline are three new currency futures namely South African Rand, Russian Rouble and the Korean Won, all of which are set for launch in Q3 2014.
Among other EM products, DGCX plans to add the MSCI India Index futures to its equity suite in Q4 2014.
The exchange will also re-list Options contracts on its Indian Rupee futures on July 18, 2014, says a report.
Regulation and Enforcement
ICE pushes CFTC for extension of cross-border margin offsets
Jon Watkins – The Trade
News | Operations & Technology | Clearing & settlement | thetradenews.com
The Commodity Futures Trading Commission (CFTC) is considering a request from ICE Clear Europe to allow non-clearing members to benefit from cross-border margin offsets.
A petition filed by ICE builds on an existing order allowing its European central counterparty (CCP) to offer portfolio margining to its clearing members.
Wall Street trade group urges new trading rules
Bob Pisani – CNBC
Weighing in on the recent battle over how stocks trade, Wall Street’s major trade group is proposing changes in how exchanges pay participants and other stock trading rules.
Fed official reiterates FX options clearing guidelines
Robert Mackenzie Smith – FX-Week
The clearing and settlement of foreign exchange options must come in line with international standards around CPSS-Iosco principles in order to ensure participants receive money on time, according to Lawrence Sweet, senior vice-president, payments policy, at the Federal Reserve Bank of New York.
Inverse Small-Cap ETFs to Capitalize on Short-Term Weakness
Tom Lydon, ETF Trends
Small capitalization companies are having a hard time catching up with their large capitalization counterparts, and some even argue that smaller stocks will keep on underperforming. Investors with a pessimistic outlook on the small-cap asset category can utilize inverse exchange traded funds to hedge against further declines.
Goldman sticks to bearish bet on gold despite recent rebound
Debarati Roy, Bloomberg News – Financial Post
Goldman Sachs Group Inc.’s Jeffrey Currie isn’t backing down from his bearish call on gold.
As bullion’s 8.7% rally this year beats gains for equities, commodities and Treasuries, he’s sticking with the view that the metal will be lower by the end of December as the economy improves. Currie, who last year got ahead of the biggest gold collapse since 1980, is an undeterred bear even as hedge funds add to their bullish holdings for a fifth straight week and assets in exchange-traded products advance.
How to Take Advantage of Volatility in Oil Prices
David Becker – InvestorPlace
Crude oil prices actually fell 3.1% last week despite rising tensions in Iraq and continued geopolitical turmoil in Israel. However, despite this decline, tensions pushed crude oil’s implied volatility to three-week highs.
Although crude oil prices will likely stabilize as the U.S. moves further into the summer driving season, volatility could continue to move higher, allowing investors to profit from an options strategy called a straddle.
VIX 101: A Perspective from a CBOE Intern
CBOE Options Hub
If you have been following the market at all in the past few months you know what has been going on with the VIX and how customers, brokers, and traders have been going bananas over it. For the young, inexperienced, or “under a rock” investors who are not too familiar with what the VIX is or how it has been acting recently, you’ve stumbled down the right rabbit hole.