JLN Options: Options market action suggests investor fear has peaked; S&P 500 regains 1,900 but nerves remain; 'Corrected' Stock Market At Crossroads

Oct 20, 2014

Observations and Insight

Tim McDermott, CEO, NADEX – You Can’t Google Map Your Career

“You will find that your career will be all about change.”

Tim McDermott, CEO of NADEX, gives an illustration of the winding road he followed throughout his career. Beginning with his time as a lawyer working for a law firm, McDermott began to take on numerous cases for First Options of Chicago, a large client for his law firm. Participating in cases involving financial markets litigation gave McDermott an introduction to the financial industry, which eventually led him to work at the CME and handle the market regulation area. Moving forward a few years, McDermott joined NADEX and eventually became CEO of the company. His overall message was that where you start isn’t necessarily where you may end up, and that every experience can either help or hurt you down the road.

Watch the video »

Lead Stories

Options market action suggests investor fear has peaked
Bloomberg (via Investment News)
Bulls looking for signs that Friday’s rally in stocks is the start of something bigger are taking signals from options and Standard & Poor’s 500 Index charts.
One way of gauging market sentiment is to compare how much it costs to buy options that protect against losses in shares this month with those timed to expire in 90 days. As selling peaked with the S&P 500 falling as much as 3% on Oct. 15, near-term options soared 25% above those timed to January, the most in three years.

S&P 500 regains 1,900 but nerves remain
Dave Shellock – Financial Times
Global stock markets made a mixed start to the week as participants’ nerves remained stretched following the turbulence seen in recent sessions.
Tokyo provided a strong early platform as the Nikkei 225 leapt nearly 4 per cent – its biggest one-day gain since June 2013 – after reports that Japan’s $1.2tn public pension fund was likely to double its holding of domestic stocks.

‘Corrected’ Stock Market At Crossroads
John S. Tobey – Forbes
Last week dramatically concluded the stock market’s correction period. Naturally, the question is, “What next?” While the proffered answers are plentiful, in this period they are only guesses. There simply are too many fundamental and technical uncertainties to form a sound forecast.

Investors Shaken as S&P 500 Reversals Ignite Volatility
Eric Lam and Joseph Ciolli – Bloomberg
David Wolf, a fund manager at Fidelity Investments in Toronto, says equity spasms such as those that shook global stocks this week scare professionals as much as everyone else.
“My dad has been quite panicky,” Wolf said of his father, Bernard, a retired economics professor from Canada’s Schulich School of Business. “He knows what markets are all about and he knows what the economy is all about, and even he gets scared” when stocks rise and fall this fast.

India VIX Index Drops Most in Five Months as Bullish Bets Rise
Santanu Chakraborty – Bloomberg
The benchmark gauge of Indian option prices fell by the most in five months as traders increased bullish bets on the CNX Nifty Index (NIFTY) after Prime Minister Narendra Modi’s party won in two state elections.
The India VIX Index lost 13 percent to 14.2 at close in Mumbai, the steepest drop since May 19. Traders held eight bearish contracts on the index for every 10 bullish wagers as of Oct. 17, near the lowest put-to-call open interest ratio in more than three weeks, data compiled by Bloomberg show.

New Tools for Options
Theresa W. Carey – Barron’s
Alibaba Group Holding ’s huge initial public offering has spurred fresh interest in the U.S. options market. Although Alibaba has been trading for just a month, its options were recently the 12th most actively traded of some 3,600 listings, with many traders rushing to place bullish bets. According to the Options Industry Council, 71.9% of Alibaba options are calls, with the remaining 28.1% on the put side, a clear vote of confidence in the stock of the e-commerce giant.

Volatility Unlikely to Alter Fed’s Policy Course
Binyamin Applebaum – NY Times
The Federal Reserve is watching carefully as financial markets bounce around, but the likely course of monetary policy remains the same, officials have said in recent public comments and interviews.
The Fed still intends to finish its bond-buying campaign at the end of the month. And it is still likely to start raising interest rates in mid-2015, although it now seems a little less likely that the Fed would act sooner, and more likely it would wait longer.

Volatility Update: Confidence-Building Week Ahead?
JJ Kinahan – Forbes
What a difference a single month can make. Four weeks ago, a record-high S&P 500 and a CBOE Volatility Index (VIX) languishing at multi-year lows south of 12 dominated our conversation. Risk perceptions remained “subdued” despite notable cracks in some assets, such as small caps and emerging markets. And now, bubbling risk-aversion across global markets makes for an interesting backdrop to the heart of corporate earnings season.

Traders See Stress-Test Relief After Europe Banks Slump
Namitha Jagadeesh and Sofia Horta e Costa – Bloomberg
The correction that swept European stocks last week induced a full-blown bear market for lenders’ shares. Investors are betting central-bank stress test results later this month will provide relief.
Deutsche Bank AG, which fell 11 percent in a month, and BNP Paribas SA, down 13 percent, helped send equity returns to more than 2 percentage points lower than the broader market, according to data compiled by Bloomberg. Traders eyeing the stress tests are pushing the cost of hedging against further declines to a two-year low relative to the Euro Stoxx 50 Index.

Will The Bounce Have Legs? – Weekly Market Outlook
Price Headley – CBOE Options Hub
Although the market technically lost ground last week, between Wednesday’s and Thursday’s back-to-back intraday reversal bars and Friday’s strong bullish follow-through, stocks ended the week on such a positive note that it’s tough not to be at least a little bullish now.  And, given that all big trends start out as small ones, Friday’s bullish seed may well be the beginning of a ‘normal’ year-end rally.

Big Move For The ‘Vol Of Vol’
Staying with the volatility theme, the latest jump in the VIX was clearly dwarfed by what we saw in 2008 or even in 2011. However that’s not true for the volatility of VIX – the so-called “vol of vol”.

VXEWZ Index at All-time High of 72.83 As Brazilian Election Nears
Matt Moran – CBOE Options Hub
Today’s closing price was an all-time daily closing high of 72.83 for the CBOE Brazil ETF Volatility Index (VXEWZ), which reflects the implied volatility of the EWZ ETF.Futures and options on the VXEWZ Index provide investors with tools to manage exposure to Brazil, the EWZ ETF, and related volatility.


ISE Announces KCG as new Primary Market Maker
Press Release – International Securities Exchange
ISE announced that KCG Americas, LLC will serve as the Primary Market Maker (PMM) for options products in Bin 5, effective today, October 20, 2014.
KCG purchased the Bin 5 PMM rights from Bank of America Merrill Lynch. KCG also serves as a PMM on ISE Gemini and a Competitive Market Maker (CMM) on both ISE and ISE Gemini.

ICE Benchmark Administration (IBA) publishes position paper on the evolution and enhancement of ICE LIBOR (“LIBOR”)
Press Release – Intercontinental Exchange
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, announced that ICE Benchmark Administration (“IBA”) has today published a Position Paper on the Evolution of ICE LIBOR.
Having taken over the administration of LIBOR in February 2014, IBA has already established rigorous oversight and surveillance mechanisms for LIBOR and the Paper sets out:
– IBA’s key findings so far on the administration of LIBOR;
– A summary of recent improvements to the LIBOR administration process; and
– Proposals for consultation on further enhancements to the LIBOR submission process.
IBA welcomed the publication of the Financial Stability Board’s July 2014 report, “Reforming Major Interest Rate Benchmarks”, which created additional momentum for change and clearly signaled that LIBOR should be underpinned to the greatest extent possible with transaction data.

Regulation and Enforcement

Why High-Frequency Trading Is So Hard to Regulate
Peter J. Henning – NY Times
Stock manipulation is one of the great bugaboos among investors because it generates fear that the market is as rigged as a three-card monte game on a Bronx street corner. Since the publication of Michael Lewis’s book “Flash Boys” earlier this year, high-frequency traders have come under increased scrutiny for their use of sophisticated computer programs that can whipsaw prices by flooding the market with orders in milliseconds.

Esma kicks off NDF clearing consultation
Michael Watt – FX Week
The European Securities and Markets Authority (Esma) has launched a consultation on non-deliverable forward (NDF) clearing, though a target implementation date for the final rules has yet to be set.
According to the consultation document, NDFs referenced in Brazilian real, Chilean peso, onshore renminbi and seven other mainly emerging market currencies will be authorised.


Russell Investments Strategists’ Outlook: Aging bull market offers slim pickings
Press Release – Russell Investments
Russell Investments released today its Strategists’ 2014 Global Outlook – Fourth Quarter Update, which provides the most recent guidance for the firm’s multi-asset portfolios and services from Russell’s global team of investment strategists.
Encountering the third oldest bull market in the past 50 years wrought with increasing volatile and stretched valuations, Russell’s strategists explain in the report why they do not see an imminent turning point. They maintain their core investment strategy views stated in their 2014 Annual Outlook, namely a moderate preference for equities over fixed income, a liking for credit, and a bias against exposure to rising long-term interest rates.

Goldman: How to Trade Amazon Before Earnings
Steven M. Sears – Barrons
Goldman Sachs is telling clients Amazon could rise 30% over the next year.
The bank feels so strongly about Amazon.com’s (ticker: AMZN ) potential to surge that it added the stock to the bank’s vaunted Conviction Buy list, which is reserved for the top picks of its stock analysts.
Internet analyst Heath Terry is telling clients that Amazon’s fundamentals—always a concern because the stock trades at such a high multiple to earnings—should improve over the next several quarters.

Brokers: Time for Investors To Hit the Buy Button
Michael Kahn – Barrons
As a reluctant old-timer, I still call big banks such as Goldman Sachs brokers and still chart the NYSE Arca Securities Broker/Dealer Index, known by its options root XBD. Earlier this month, as the broad market sold off sharply, the XBD fared worse, presumably as the next bear market would hurt investment banking and put the kibosh on retail stock trading.

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