Observations & Insight

Paul-André Jacot; The Story of a Man, an Organization and a Conference
I Will Go To Bürgenstock This Year In Honor of Paul-André
Paul-André Jacot

By John J. Lothian

Paul Meier, the longtime chairman and now honorary chairman of the Swiss Futures and Options Association, has written a tribute to his friend and SFOA colleague, the late Paul-André Jacot, who passed away last week.

The tribute is about Paul-André, but it is also about the SFOA, its history and the Bürgenstock conference. While Paul Andre has left this world for the next, the Bürgenstock Conference still hangs on despite many predictions of its demise.

The SFOA and Bürgenstock are part of my history too. Bürgenstock was my first overseas conference as the writer of this newsletter back in 2004. It was a magical conference, and both Paul-André Jacot and Paul Meier helped make it that way. And Carol Gregoir, the longtime secretary, helped as well.

For the rest of the commentary, go to here

Lead Stories

One of the Most Successful Trading Strategies This Year May Be Coming to an End
Inyoung Hwang – Bloomberg
Investors who’ve been minting money according to the Wall Street adage that the trend is your friend just got a reminder that nothing works forever.
A Citigroup Inc. index that tracks U.S. momentum stocks like Apple Inc. and Netflix Inc. did something last week it hadn’t done since June — it fell. While still trouncing the Standard & Poor’s 500 Index in 2015, analysts at the bank have warned that the strategy is approaching a threshold where rotations have occurred in the past.

China’s Turbulent Markets Keep Still-Eager Investors Guessing
Alexandra Stevenson – NY Times
As China’s once-staid currency suddenly dropped sharply last week, Wall Street began sniffing around for a way to profit.
A trader on Goldman Sachs’s Hong Kong trading desk sent a memo to hedge fund clients highlighting one opportunity: Taking advantage of a price difference between China’s onshore renminbi and its offshore version. The currency is not freely tradable, and it was trading in Hong Kong as much as 1.5 percent lower than in China.

Pimco Sees Sept. Fed Move Underpriced, Clashing With Options
Lucy Meakin and Benjamin Purvis – Bloomberg
Investors are underpricing the chances of the Federal Reserve raising interest rates next month, according to Pacific Investment Management Co.
Options on rates and currencies indicate investor skepticism may be growing that the first increase since June 2006 will come at the Fed’s Sept. 16-17 meeting. The odds for that had dropped to 50 percent on Wednesday from 54 percent almost two weeks ago. That’s based on fed-funds futures and on the assumption that the effective rate will average 0.375 percent after the increase.

Cool Derivatives and Bank Consultants
Matt Levine – Bloomberg View
I used to sell equity derivatives, and the way you sell equity derivatives is by telling scary stories about the future. Are you worried that the crisis in Ruritania will wreak havoc on your tungsten-miner stocks? We can build a product for you that will give you peace of mind. There are only so many products in the world, honestly, so the one we’ve built for you more or less reduces to a put option (deeply, it reduces to selling some deltas of your tungsten-miner stocks). But we don’t use terms like that, which are alienating to non-experts and which send experts scurrying to their Black-Scholes calculators to see how much we’re overcharging them. We just talk in terms of the story. What if a bad thing happened? What if we could save you from the bad thing? There, there.
This is of course a well-established business. Banks do it for retail clients in the form of structured notes, which combine a variety of retail-friendly derivatives stories with cheap funding for the bank. There is a tendency to be suspicious of structured notes, but whatever, everyone’s got to make a living.

Get used to cheap oil, derivatives markets say
Christopher Johnson – Reuters
Oil prices will stay low for years to come, derivatives markets say, keeping a lid on inflation and helping boost global growth.
Oil has more than halved in value over the last year, thanks to huge oversupply, and many oil companies, particularly in the United States, say they may soon have to rein in production, tightening supply, unless the market recovers.


CME Futures Draw More Currency Traders Than Ever Amid Bank Fines
Lananh Nguyen – Bloomberg
CME Group Inc. said its foreign-exchange futures contracts are attracting more traders than ever as investors seek safety in exchanges after banks paid billions of dollars to settle claims of currency manipulation.

RJ O’Brien goes live with LME membership
Alice Attwood – Let’s Talk Derivatives
The European arm of US broker RJ O’Brien has Wednesday gone live on the London Metal Exchange (LME), following its approval as a category two clearing member of the metals exchange in July.
As reported by FOW, the broker’s application to be admitted for the first time as a direct trading member of the London Metal Exchange was approved on July 23.

Timetable for Nasdaq Migration of Disaster Recovery Site Announced
John D’Antona – Traders News
As per previous plans, exchange operator Nasdaq is moving its back-up disaster recovery facility to Chicago from Virginia. And now a timetable has been announced.

Regulation & Enforcement

Are Wall Street Interns the Latest Regulatory Target?
Daniel Huang and Emily Glazer – WSJ
It’s official: Certain interns may be dangerous to a bank’s health.
Bank of New York Mellon Corp. on Tuesday agreed to pay $14.8 million to settle civil charges that it violated foreign-bribery laws by giving internships to relatives of officials from a Middle Eastern sovereign-wealth fund.


Fidessa gets new finance boss
Insider Media
Fidessa, a listed Surrey-based supplier of software to the financial services sector, has appointed Andy Skelton as its new chief financial officer.
Skelton will replace Andy Malpass, who announced his retirement in February 2014, as chief financial officer on 26 October 2015.


Implied Volatility for the FXI China ETF August Options Jumped 20% the Past Two Days
Matt Moran – CBOE Options Hub
A report today at http://money.cnn.com noted that –
“The bears have returned in China. The Shanghai Composite shed 6.2% on Tuesday, once again bringing the key index below the 3,800 point mark. …Tuesday’s slump was the sharpest decline since July 27.”
A key issue for options investors is – how does the volatility in the Chinese stock markets impact the prices and implied volatility of exchange-listed options around the world? The first chart below shows a red line with the implied volatility estimates by Livevol for options on the iShares China Large-Cap ETF (FXI) that expire this Friday, August 21 – this implied volatility rose from around 27.9 on August 14, to 33.6 today, a 20% rise over two trading days

Long August VIX Puts Into Expiration
Russell Rhoads – CBOE Options Hub
Something I have been watching for some time is the futures pricing relative to spot VIX the Friday before settlement. The spread, when very little is going on, is usually about a point of premium in the soon to expire VIX future relative to the index. As noted above, the August VIX futures settlement was well over a point higher than VIX on Friday. This means if VIX does not move at all between Friday’s close and Wednesday’s settlement (I know, a reality stretch, but work with me here), a short position in the future would result in a profit. This trade can also be done through purchasing VIX put options as VIX option pricing reflects the level of the underlying futures contacts. I decided to take a look at several August VIX Put option prices from the close on Friday.

FX Options Lowdown: China’s fix and the opportunities it opens
Ben Ridgeway – Saxo Bank TradingFloor
The Peoples Bank of China adjustment of the yuan by 1.9% during Asian trading on August 11 sent USDCNH spot far higher – from a low of 6.2136 to a high of 6.3741. The CNY* fix (the central fixed rate between it and the dollar, adjusted by the PBoC daily) stood at 6.2298 compared to the anticipated level of 6.1142 that day.
Notably, volatility in USDCNH skyrocketed, particularly in the front end. The one-week straddle volatility moved within the inter-dealer market from below 2% to over 12%.


A Market Top? 15 Warning Signs
Gary Gordon – Seeking Alpha
Stocks are tumbling in Russia, Brazil, Chile, South Africa, Australia and Canada due to economic weakness in China. Meanwhile, the Vanguard Europe ETF remains roughly 5.5% off of its May high, as the feel-good effect of $1.3 trillion in European Central Bank stimulus subsides.
In truth, risk assets from across the spectrum are fading. Exchange-traded vehicles as diverse as iShares High Yield Corporate Bond, iShares Russell 2000, iPath Commodity and Vanguard FTSE Emerging Markets are all battling downtrends.

Indicator of the Week: The Boom-or-Bust Nature of Fed Minutes
Rocky White – Schaeffer’s Research
The minutes from the latest Federal Open Market Committee (FOMC) meeting will be released today at 2 p.m. ET. Investors will read them for an indication of whether or not the Fed will raise interest rates next month. This week, I’m taking a look at prior days when the central bank released minutes to see what stocks did. Maybe it will give us some insight on what to expect today and for the rest of the week.

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