Options premium sellers make hay while volatility rules
Saqib Iqbal Ahmed – Reuters
Wild gyrations in the U.S. stock market that sent a key measure of volatility to a near seven-year-high has created a big opportunity for options premium sellers, and traders are making the most of it while it lasts.
Mexico Accelerated Global Oil Slump Through Derivative Deals
Javier Blas – Bloomberg Business
When oil collapsed to a six-year low this month, weak demand from China and extra barrels from Iran and Saudi Arabia were marked as the prime suspects. Another country, less central to global energy markets, had a big part to play: Mexico.
The Latin American nation didn’t affect physical oil flows — instead, its role was financial. Every year, Mexico locks in the price of oil for the following year in a series of derivatives deals. While the hedges didn’t trigger the slump, they accelerated the downward trend.
Japan’s Top Fund Pays Price for Returns as Volatility Hits
Kathleen Chu and Komaki Ito – Bloomberg Business
Investors in Japan’s top-performing fund through June had gotten used to at times dizzying returns from a complex strategy of betting on options and convertible bonds. Then there are days like Monday.
High-frequency trading a volatile problem: Mike Smith, Ian Narev
The chiefs of Commonwealth Bank and ANZ have taken aim at high-frequency traders, warning the ultra-fast buying and selling of securities was intensifying market volatility.
Will the Next Recession Be Made in China?
Peter Coy – Bloomberg Business
When the Dow Jones industrial average fell almost 1,100 points soon after the opening bell on Aug. 24, the world suddenly seemed like a very small place. A tidal wave of stock selling that began in Shanghai had rolled all the way into lower Manhattan as China’s problem became, undeniably, America’s. Wall Street panicked. General Electric, JPMorgan Chase, and Home Depot lost a fifth of their value in minutes. For the first half-hour, the Chicago Board Options Exchange couldn’t even calculate its Volatility Index, also known as the fear gauge. Markets from Asia to Europe preceded the U.S. downward. “There’s no rational choice anymore, no rational reaction,” Michael Woischneck, a senior equities manager for Lampe Asset Management in Düsseldorf, Germany, told Bloomberg.
Steep stock losses have some investors loaded for bear
David Randall and Saqib Iqbal Ahmed – Reuters
After a six-day span in which the benchmark Standard & Poor’s 500 dropped 11 percent, some fund managers and analysts on Wall Street are raising the possibility that a bear market may be looming for the first time since 2009.
Can Historically Massive VIX Pops Predict Future SPY Moves?
Adam Warner – Schaeffer’s Investment Research
This CBOE Volatility Index (VIX) pop isn’t exactly in the rearview yet — but hey, we can still throw out some interesting comps to VIX pops of years past!
VIX and the S&P 500 ETF Trust (SPY) have an inverse relationship, as we all know. Over the course of VIX history, there’s a correlation of negative 0.71. Square that, and it implies that the move in the S&P on a given day explains about half of the VIX move. That sounds about right, since VIX ostensibly looks forward. It proxies implied volatility 30 days out, and that implied volatility is more or less an estimate of the volatility the S&P 500 Index (SPX) will actually realize.
Confused Investors Search for Direction on Volatility (VIDEO)
Scott Bauer, senior market strategist at Trading Advantage, and Bloomberg’s Julie Hyman examine what may come next in the CBOE Volatility index in today’s “Futures in Focus.” They speak on “Market Makers.”
Options Clearing Corp faces pressures of systemic status
Steve Marlin – Risk.net
Business continuity is one of several critical operational risks for the US Options Clearing Corporation – chief risk officer John Grace explains the pressures of operating a key financial utility Business continuity is high on the operational risk list for the US Options Clearing Corporation, which clears about four billion US equity options contracts each year in Chicago.
A New York hedge fund is having a monster month thanks to market mayhem
Julia La Roche – Business Insider
New York-based Capstone Investment Advisors, a $3.6 billion hedge fund, is having a huge month thanks to the market mayhem.
Capstone, a volatility hedge fund founded by Paul Britton, runs a number of portfolio-protection funds that seek to profit from wild moves in asset prices.
India VIX Drops Most in Eight Months Before Derivatives Expiry
Santanu Chakraborty – Bloomberg Business
India’s benchmark gauge of equity-option costs dropped the most in eight months, as the CNX Nifty index rebounded from a 10-month low amid gains in Asian stocks.
NFX taps 16% of natural gas options market
Alice Attwood – Futures & Options World
Nasdaq’s new energy platform, Nasdaq Futures (NFX) has enjoyed a successful first month of trading, according to its CEO, with the fledgling exchange tapping a 16% share of the natural gas options market.
Exchanges Benefit From Market Turmoil
European and US exchanges experienced a boost in trading volumes this week, with some venues hitting new records, as investors reacted to the market turmoil in China.
Euronext, the pan-European exchange, said in a statement that it had record trading volumes on its markets on Monday 24 August after investors reacted to the Shanghai Composite suffering its biggest fall since 2007.
HKEx Intends To Rely On SEC Class No-Action Relief Letter Covering Foreign Options Markets And Certain Options Traded On Them
Press Release – Mondovisione
The Stock Exchange of Hong Kong Limited (SEHK) and Hong Kong Futures Exchange Limited (HKFE), subsidiaries of Hong Kong Exchanges and Clearing Limited (HKEx), have notified the US Securities and Exchange Commission (SEC) that they and/or their Participants intend to engage in limited activities to familiarize certain registered broker-dealers and other financial institutions in the US with certain options traded on their markets, in reliance on and subject to compliance with the conditions specified in the SEC class no-action relief letter that is dated 1 July 2013 and applies to all foreign options markets and their members and representatives.
Regulation & Enforcement
FIA, FIA Europe And FIA Asia Announce Merger Plans
Press Release – Mondovisione
The respective boards of FIA, FIA Europe and FIA Asia today announced that they have reached an agreement to formally merge the three associations in the first quarter of 2016.
Since June 2013, the three associations have been working closely together under an affiliated global structure, FIA Global, which enabled the independent organizations and their boards to better coordinate policies and priorities.
Judge dismisses HFT case against Barclays and US exchanges
Ben McLannahan in New York – FT
A district court judge in the US has thrown out investor lawsuits against Barclays and a host of exchanges, dismissing claims that the bank rigged its “dark pool” trading venue in favour of high-frequency traders.
44 Percent of Buyside is Processing Complex Swaps Manually, Survey Says
John D’Antona Jr. – Traders News
It seems that when it comes to trading and processing derivatives trades such as complex swaps, the buyside favors a manual approach.
A recent survey released by SimCorp, a provider of electronic investment management solutions, has revealed that 44% of buyside asset managers are relying on mostly or completely manual processes for managing complex swaps across the investment lifecycle. And more than 50% claim they still require some amount of manual intervention in a semi-automated process.
Return of the Big VIX Trade
Russell Rhoads- CBOE Options Hub
Beginning back in the spring there was a very large 1 x 2 VIX Call spread that was rolled from month to month for several months. With the excess volatility it appears the trade was exited earlier this week. But that is apparently not the end of the story….
Yesterday there was a buyer of about 92,000 VIX Oct 15 Calls for 8.00 who sold about 184,000 VIX Oct 21 Calls at 4.80 which boils down to a credit of 1.60 per spread. The payoff, if held to October expiration, appears below along with yesterday’s close for standard Sep VIX Futures and spot VIX.
Avoid Buying Put Insurance When You are Most Afraid
Wesley Gray – Equities.com
Here’s a timely piece on S&P 500 put option prices. The authors find that S&P 500 put options get too expensive during wild times largely due to two specific effects:
-Demand for insurance skyrockets (investor utility demands safety)
-Supply for insurance becomes restricted (credit constraints cripple market makers)
The lesson seems to be straight forward: buy insurance when you don’t “feel” like you need it; avoid buying insurance when you “feel” like you need it (i.e. insurance prices can become more expensive – and move away from theoretical prices – in market downturns).
Profit From a Surging VIX
Steven M. Sears – Barron’s
If you liked the VIX at 12, you should love it at these elevated levels.
A high VIX today suggests your fellow investors are scared out of their minds that China’s economic and financial difficulties will send the world spinning into a very dark place.
However, if you think that the CBOE Volatility Index view of what may happen in the next 30 days is extremely pessimistic, the options market is a paradise for put sellers.
How To Manage This Week’s Unprecedented Volatility
Bruce Kasanoff – Forbes
In an interview yesterday on Marketplace, Robert Whaley, father of the Volatility Index (VIX) that measures whether or not there is too much fear or optimism in the financial markets, said that at the “beginning of the week VIX was about at a level of 12, at the end of the week it was at 28. That was the biggest percentage increase the VIX has ever had in its entire history.”
Trading outside of Your Comfort Zone – Fear vs Greed
Khalid Slim – Finance Magnates
There is a common denominator among most beginner traders, which is that most of them start trading in order to deviate from their average daily routine. Some people go bungee jumping, others trade the financial markets – crazier things have happened.
Whenever someone’s perception departs from their expectations, their heart rate inevitably rises – some people handle deviations better than others, but everyone ultimately has a breaking point.
Surviving Market Volatility Again
Bob Lang – CBOE Options Hub
This past week was a difficult one for markets. That is probably an understatement, as the SPX 500 fell a stunning 5% during the week, the Dow Industrials dropped more than 530 points, or more than 3%. It was the worst week in nearly a year and set the indices back to losses in 2015. Seems like a big move, right? It was ‘only’ 3%, but to put that into context – in 1987 the Dow Industrials dropped a similar amount, or 508 points. But that was a massive crash, falling 22% in one session. For the week, the Industrials lost about 1000 points, and it happened with amazing speed.