Observations & Insight

Can Options-based funds compete?
By Jim Kharouf
The CBOE announced the release of a new study today, “Highlights of Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs,” which analyzed the growth and performance of exchange-listed options-base funds. What is notable about the chart-laden report, is the growth of options-based funds from just 10 in 2000, to 119 in 2014 with a total of $46 billion in AUM.

The report looked at 80 options-based equity funds, 51 mutual funds, 22 closed-end funds and seven ETFs with a total of $27.6 billion in AUM. The study found that options-based funds had higher risk-adjusted returns than the S&P 500 Index.

However, it should also be pointed out that options-based funds typically outperform the S&P 500 in down markets but underperform in strong markets. The study showed that the annualized return from January 2000 to December 2014 was 4.21 percent in options-based funds, 4.07 percent for the BXM and 4.24 percent for the S&P 500.

Some would say, “So what?” A simple long-only position still outperforms the options-based funds. But what should be pointed out is that drawdowns were less severe with the options-based funds which posted a maximum drawdown of -42.2 percent over that period, while the S&P 500’s largest drawdown was -50.9 percent. The BXM’s maximum drawdown was -35.8 percent. Investor time horizons and strategies should be considered.

**The full white paper can be found HERE

New White Paper on Fund use of Options in Portfolio Management Released
Press Release – CBOE
The Chicago Board Options Exchange (CBOE) announced today the release and publication of a groundbreaking new study: “Highlights of Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs.” The study analyzed SEC-regulated investment companies (mutual funds, exchange traded funds (ETFs) and closed-end funds (CEFs)) that focus on use of exchange-listed options for portfolio management (options-based funds).
The study found that the number of options-based funds grew from just 10 in 2000 to 119 in 2014, and presents a first-ever publicly available list of names and ticker symbols for those options-based funds.

New Study Presents First-Ever List of 119 Funds That Use Options
Matt Moran – VIX Views
A groundbreaking new study — “Highlights of Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs” — analyzed SEC-regulated investment companies that focus on use of exchange-listed options for portfolio management (options-based funds). Key highlights of the study are summarized below, and for more analysis please visit www.cboe.com/funds.

Lead Stories

Nerves Rattled in U.S. Equities as S&P 500 Volatility Turns Ugly
Callie Bost – Bloomberg
To Paul Zemsky, the challenge in the stock market is to keep your head while others are losing theirs.
“As an investor, what I’m thinking right now is don’t panic,” said the 52-year-old head of multi-asset strategies at Voya Investment Management LLC in New York. He spoke as the Standard & Poor’s 500 Index (VIX) staged one the most volatile sessions in three years, rising as much as 1.4 percent and falling 1 percent as West Texas Intermediate crude briefly dipped below $45 a barrel and copper hit its lowest level since 2009.

***DA: There is a difference between panicking and lightening the load after a massive 5-year rally.

Today’s Number: More Than $1 Quadrillion Traded in 2014
Evan Peterson – OpenMarkets
At the start of 2014, any discussion about trade volumes usually referenced a “return to volatility.” Futures volumes were relatively low, and most asset classes were not moving much on a daily basis. Fast forward a few months and the market was awash in volatility. The Fed first cut back quantitative easing, then anticipated a rate increase; demand in China continued to slow; conflict in the Middle East and Ukraine emerged; and suddenly the world looked different.

***DA: When bragging about volume, it is fun to use notional value. When regulators start playing with capital requirements, notional value becomes an arbitrary construct with no relation to actual net exposure. Go figure.

Listed Options Volume Up 20 Percent at 355 Million Contracts in December
John D’Antona Jr. – Traders Magazine
U.S listed options volume bounced back in December after a dismal November.
Happy holidays, traders.
According to Tabb Group, U.S. listed options volumes rebounded in December, rising 20 percent compared to November, coming in at 355 million contracts. November listed options activity was 294.8 million.

Signals Cross in U.S. Stocks as Volatility Doubles on Oil
Callie Bost – Bloomberg
Signals from energy and bond markets are rattling the nerves of stock investors.
Daily swings in equities have doubled from last year to 1.1 percent in 2015 as oil falls the most since 2008 and yields on 10-year Treasuries slide toward 1.9 percent. The stress has pushed a Bank of America Corp. gauge of hedging costs in bond, stock, currency and commodity markets to an 18-month high.

What to Make of a Flattening VIX Futures Curve
Adam Warner – Schaeffer’s Investment Research
Time to open up the viewer mailbox!
“Just as interesting as the treasury curve flattening, is the vix curve flattening out. Maybe a blog topic for you….seems rare.”
Indeed, we are on the flat side in CBOE Volatility Index (VIX) futures land.

Wall Street’s collective forecast: more volatility
Kate Gibson – CNBC
The increased volatility on display Tuesday, when the Dow industrials rallied as much as 282 points and fell 143, is the theme for equities in 2015.
Whether citing the Federal Reserve’s pulling back on its quantitative easing, the European Central Bank adding stimulus or crude’s extended decline, market analysts say the market’s wild swings can be expected to continue.

***JB: If only the press would write more stories on volatility (that’s sarcasm).

ICE Futures Europe Achieves Daily Volume Record in NBP Natural Gas
Press Release via MarketWatch
Intercontinental Exchange, the leading global network of exchanges and clearing houses, today announced that the ICE Futures Europe NBP Natural Gas futures and options contracts achieved a daily volume record of 148,765 lots (equivalent to 4.48 billion therms) on January 13, 2015. The previous record of 120,145 lots was set on March 3, 2014.


CBOE Begins Disseminating Volatility Index Values on Three of CME Group’s FX Options Contracts: Dollar/Euro, Dollar/Bp and Dollar/Yen
Press Release – CBOE
The Chicago Board Options Exchange (CBOE) announced today that it began disseminating values for three new volatility indexes that CBOE calculates using the prices of CME Dollar/Euro, Dollar/British Pound and Dollar/Japanese Yen futures options.
The CBOE/CME FX Euro Volatility IndexSM (ticker: EUVIX), the CBOE/CME FX British Pound Volatility IndexSM (ticker: BPVIX) and the CBOE/CME FX Yen Volatility IndexSM (ticker: JYVIX) are the first benchmarks to track the volatility of foreign exchange (FX) futures options. The underlying options are the most liquid FX options traded at the CME, and in 2014, accounted for a combined 80 percent of the over 15 million total currency options traded at CME.

Dealpolitik: Where Was the Good Governance at GFI Group?
Ronald Barusch – WSJ
BGC Partners Inc.BGCP announcement last week that it would wage a proxy fight to defeat CME Group Inc.CME deal to buy GFI Group Inc.GFIG for $5.25 per share in cash and CME shares should be no big surprise. BGC has made a competing cash tender offer at $5.45 per share, and so far GFI hasn’t shown it much love. More importantly, it looks like GFI’s board and management haven’t been a model of good corporate governance on this deal.

Invesco PowerShares Licenses Russell 1000 Equal Weight Index for New ETF
Press Release – Russell Investments
Invesco PowerShares Capital Management LLC (“Invesco PowerShares”) has recently selected the Russell 1000 Equal Weight Index as the basis for a new exchange traded fund (ETF).*
The Russell 1000 Equal Weight Index offers a unique and practical alternative to conventional weighted indexes. Rather than assigning an equal weight to each index constituent, Russell’s sector equal weight methodology equally weights each sector within the index and then equally weights the companies within each sector. This innovative approach can provide greater potential diversification benefits than traditional equal weight indexes.

MarketAxess Wins “SEF of the Year” Award From Risk Magazine
Press Release via CNN Money
MarketAxess Holdings Inc. (Nasdaq:MKTX), the operator of a leading electronic trading platform for fixed-income securities, and the provider of market data and post-trade services for the global fixed-income markets, has been named SEF of the Year for 2015 by Risk magazine.
This award acknowledges MarketAxess’ superior SEF trading functionality, including its disclosed and anonymous Request-for-Quote (RFQ), SEF Central Limit Order Book (CLOB), and Click-to-trade functionality.

Regulation & Enforcement

In New Congress, Wall St. Pushes to Undermine Dodd-Frank Reform
Jonathan Weisman and Eric Lipton – NY Times
In the span of a month, the nation’s biggest banks and investment firms have twice won passage of measures to weaken regulations intended to help lessen the risk of another financial crisis, setting their sights on narrow, arcane provisions and greasing their efforts with a surge of lobbying and campaign contributions.

U.S. SEC puts exchanges on notice about upcoming examinations
Sarah N. Lynch – Reuters
The U.S. Securities and Exchange Commission sent letters to stock exchange officials on Tuesday, alerting them about the agency’s plans to conduct a sweeping series of compliance examinations in 2015.

***DA: You have been warned.


Wall of Worry is up High in 2015
Bob Lang – CBOE Options Hub
We love market skeptics, as they will take any particular piece of news and spin it negatively. Don’t get me wrong, when there is ‘bad’ stuff happening we must take notice of it and respond accordingly. But, is there anyone out there who is not spooked after the first week of trading the new year? Yes we had a couple of strong days midweek but the indices are decidedly negative.
A Wall of Worry is up, and as a contrarian thinker this is where I want to be involved, too many skeptics and the markets can rise. There are so many uncertainties out there, but that rally we saw was likely caused by a little certainty, where a Fed Governor stated the Fed should not raise rates for at least a year. Time for an exhale.

Oil fund draws huge bearish spread
Chris McKhann – optionMONSTER
The biggest option trade of the day so far is looking for another leg down in the U.S. Oil Fund.


CME Group Launches the ‘Futures Institute’ to Help Develop Traders in the Futures Markets
Press Release – CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced the launch of the Futures Institute, an innovative new online platform for futures and options on futures education, trading simulation and market research. The Futures Institute works with partners across the industry to distribute best-in-class education aimed at providing market participants with the knowledge and resources to trade futures.

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