JLN Options: Options Traders Favor Intraday Margining; Where Has the Fear Gone?; What to Make of the Latest Volatility Gauge

Nov 12, 2014

Lead Stories

Options Traders Favor Intraday Margining
Portfolio margining on options positions offers substantial cost savings in terms of reducing the amount of capital needed to be set aside against losses, but it also requires intensive computational resources that are likely to be out of reach for all but the largest banks.
The Options Clearing Corp. currently calculates regulatory margin requirements after the end of the trading day, leaving the active trader without a good estimate of margin during the day, and thus exposed to margin calls based on current trading activity, according to Robert Newhouse, CEO of Victor Technologies.

Where Has the Fear Gone?
MoneyBeat – WSJ
Is there any fear out there?
Judging by the current level of the CBOE Volatility Index, investors have already forgotten the nasty selloff of just a month ago.
Worries about slowing global growth and a sharp drop in oil prices helped shake stocks from a period of calm a month ago. The S&P fell 7.4% between Sept. 18 and Oct. 15. As the S&P fell, the VIX jumped, hitting its high for the year of 26.25 on Oct. 15.
Now the VIX is less than three points away from its low of the year, which was also the lowest level since February 2007.

What to Make of the Latest Volatility Gauge
Adam Warner – Schaeffer’s Investment Research
We’ve had the ability to publicly trade volatility directly for about a decade now. First came CBOE Volatility Index (VIX) futures. Then came VIX options. And so on and so forth to now, where we have hundreds of vehicles. It’s become an unquestioned success, as interest and volume are booming, most especially in VIX futures and options themselves. Much of that surge is thanks to non-equity players using VIX as a general hedge. Credit players are now thought to be the biggest players in VIX products. But, there’s some debate as to how well VIX works as a credit portfolio hedge.

Europe Hedges Hit 15-Month High as Rally Draws Skeptics
Sofia Horta e Costa – BloombergBusinessweek
The three-week rebound that has pushed European stocks up 8 percent has brought back the skeptics in options markets.
Shares tracked by the Euro Stoxx 50 Index have recouped more than half their decline from a June high to a 13-month low on Oct. 16. Based on implied volatility, the key gauge of options prices, buying protection against losses in European stocks is 19 percent more expensive than for the Standard & Poor’s 500 Index, the biggest gap in 15 months, according to data compiled by Bloomberg.

Calculating The New VIX
Vance Harwood – Investing.com
The chart below graphically represents the calculation for the VIX® and the legacy VIX (ticker VIXMO), which was used from September 22, 2003 through October 5, 2014.  The actual VIX is located on the black dotted line in the left center of the graph.

Regulation and Enforcement

Six Banks to Pay $4.3 Billion in First Wave of Currency-Rigging Penalties
Suzi Ring, Liam Vaughan and Jesse Hamilton – Bloomberg
Citigroup Inc. and JPMorgan Chase & Co. were the hardest hit in the first settlements since authorities began a global probe into the rigging of key foreign-exchange benchmarks last year.
Citigroup will pay $1.02 billion to three regulators in the U.S. and U.K., and JPMorgan $6 million less, according to statements from the firms today. They are among six firms that will pay $4.3 billion to four regulators ranging from the U.S. to Switzerland’s Financial Market Supervisory Authority.

‘We Protect Each Other’ – The FX Files
Katie Martin – WSJ
We’re digging through a mountain of documents on the FX settlements in the U.K., U.S. and Switzerland, including colorful chat transcripts peppered with jargon, banter, and bad spelling (which we are not correcting here).
Here’s a rundown of some key points.

End Users Face Swap Margin Requirements
The issue of margin for non-cleared derivatives is a contentious one for swap-market participants.
Although hedge funds are generally subject to both initial and variation margin, non-financial end users are faced with the prospect of having to post margin for the first time.
Throughout the legislative process, both in the U.S. and in Europe, there have been active efforts by end users to be excluded from margin requirements.

CFTC’s Giancarlo Says New Rules Are Dividing Swaps Market
Katy Brune – WSJ
A top U.S. regulator said new rules governing the multitrillion-dollar derivatives markets are sending swaps trading overseas, threatening Wall Street jobs and potentially destabilizing financial markets.
In remarks he intended to deliver at an industry conference this week, J. Christopher Giancarlo, the lone Republican among four commissioners at the Commodity Futures Trading Commission, said the agency’s rules have split the swaps market into domestic and foreign niches, as non-U.S. firms seek to avoid CFTC oversight.


Trading Technologies Wins “Best Buy-Side Commodities Trading Platform” at Buy-Side Technology Awards
Press Release – Trading Technologies
Trading Technologies International, Inc. (TT), a provider of high-performance professional trading software, was named “Best Buy-Side Commodities Trading Platform” at Waters Technology’s Buy-Side Technology Awards luncheon in London last Friday.

Options Education

Index Options: A How-To Guide
Trevir Nath – Investopedia
Similar to stock options, index options are financial derivatives that draw their value from an underlying asset. In this case, index options are derived from the value of an underlying stock index. Like an option, the holder of an index option has the right to buy or sell an index or basket of stocks, such as the S&P 500 or NASDAQ, at a predetermined price and date. Investors generate profits from an expected move in the market or mitigate the risk of holding the underlying instrument in particular indexed funds.

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