JLN Options: Options trading error heightens clearing fears; DERIVATIVES: CME expands European OTC clearing effort; Bitcoin Derivatives Sprout as Regulators Play Catch-Up

Feb 28, 2014

Lead Stories

Options trading error heightens clearing fears
Central clearing concerns have been reignited after an erroneous options trade pushed South Korea’s HanMag Securities to the brink of bankruptcy and set in motion the Korea Exchange’s default waterfall, mutualising W46bn (US$43m) of losses among clearing member firms.
The latest clearing debacle is a stark reminder of the potentially risky path regulators have set upon as they mandate large chunks of the US$693trn over-the-counter derivatives market for central clearing.

DERIVATIVES: CME expands European OTC clearing effort
The CME Group has received regulatory approval to expand the clearing effort for over-the-counter interest rate swaps at its London-based CCP, CME Clearing Europe.
As of March 3, the firm will add overnight index swaps, zero coupon swaps, forward rate agreements, basis swaps, variable notional swaps and Nordic currencies to its product mix as it aims to take on LCH.Clearnet’s SwapClear in OTC derivatives clearing.

Bitcoin Derivatives Sprout as Regulators Play Catch-Up
Carter Dougherty and Silla Brush – Bloomberg
The bankruptcy of a major Bitcoin exchange in Japan not only focused attention on the digital currency’s risks, it also rattled a still-newer market that regulators are just starting to monitor: Bitcoin derivatives.

The Tale of the S&P 500, the VIX, and One Magnetic Level
Adam Warner – Schaeffer’s Investment Research
This will sound odd, but the most interesting thing about the market lately is the incredible lack of ability to pick a direction for more than like an hour. If you’re an S&P 500 Index (SPX) bull, you’ve had countless threats to vault over 1,850, and they all fizzled out until yesterday. On the surface, that was somewhat bearish in the short term, yet every time it looked like the SPX was about to fall out of bed, it rallied again.

Stocks End Strong Month in Volatile Fashion; S&P 500 Closes at New High
Schaeffer’s Investment Research (via NASDAQ)
“What a wild ride to end the week,” exclaimed Schaeffer’s Senior Technical Strategist Ryan Detrick, CMT. “Everything was great, and we had new highs pretty much across the board. Then news of continued tensions between Russia and Ukraine hit the wires and sent stocks tanking. After some more wild gyrations, we closed mixed on the day.” The Dow Jones Industrial Average (DJI) visited negative territory briefly this afternoon before closing well off its intraday high.

Is the market overvalued?
Anthony Mirhaydari – CBS News
After a quick up-and-down related to problems with emerging market currencies, as well as simmering credit woes in China, the bulls have pushed the stock market right back to where it was late last year.
But something is different this time.


Exchanges See Data Revenues Rise
Giulia Lasagni – WatersTechnology
Exchanges continue to report increases in market data revenues in their financial results, following a raft of similarly largely positive results in recent weeks (IMD, Feb. 17)—though, post-financial crisis, Latin America and Asia are no longer delivering significantly higher levels of returns than their American and European counterparts.

NYSE Member Firms Report Fourth-Quarter 2013 Results
Press Release (NYSE)
New York Stock Exchange member firms that conduct business with the public reported a fourth-quarter 2013 after-tax profit of $2.07 billion and revenues of approximately $41.7 billion, compared with a $2.2 billion after-tax profit on revenues of about $37.7 billion in the third-quarter of 2013. Comparative financial results are reported in the table below:

Regulation and Enforcement

Study: SEC staff sold shares before cases made public
Dave Michaels – Bloomberg
People working for the U.S. Securities and Exchange Commission who owned stock in companies under investigation were more likely to sell shares than other investors in the months before the agency announced it was taking enforcement actions, according to a new academic paper.

SEC Said to Ask Banks to Explain Exchange-Traded Note Disclosure
Kevin Dugan – Bloomberg
The U.S. Securities and Exchange Commission is asking whether banks are adequately explaining the risks of exchange-traded notes, a step toward its first new guidance for the market in almost eight years, according to people familiar with the matter.


Tradition Revamps Forward Swaps Data; Preps ParFX Data Offering, HFT Neutralizer
Faye Kilburn – WatersTechnology
Tradition rolled out the forward swap rates in the USD Data subsection of its subscriber-only pages on the Bloomberg Professional terminal on Feb. 4, under the swaption strikes tab. According to a notification sent on Feb. 4 informing customers of the service, the rates will provide the USD options market with “a degree of independence, accuracy and certainty,” that was previously unavailable.


Naked AAPL Options
Dan Passarelli – The Options Insider
With March finally here [Ed, well, tomorrow it will be here] , traders are still assessing when or if ever this market will have a correction like it had in January. That being the case, there are several option strategies that traders can consider depending on their outlook. Below is an explanation of a option strategy that may be right for you depending on your goals and trading personality. Regardless,  understanding this option strategy is something all traders should and need to know even if they may never use it.

Currency risk – managing uncertainty
Director of Finance Online
…While forwards offer a safe means of securing a rate, Foreign Exchange Options (FX Options)offer a more sophisticated means of hedging against currency volatility – in simple terms, and for the majority of our clients, limiting the downside of adverse currency movements while retaining some potential upside if exchange rates move in their favour.

Options Education

VXST and the “Weekend Effect”
Russell Rhoads – CBOE
Whenever we have a Friday or Monday market holiday and a three day weekend is on the horizon I will often remind traders about the impact that the extra day off should have on VIX.  For those new to VIX, the calculation that determines the value of VIX is based on calendar days, not trading days.  The result is a bit of a headwind that will compress the value of VIX into a weekend.

How Time Decay in Options Can Be Your Best Friend – Know Your Options
Zacks.com (via NASDAQ)
Today let’s talk about one of the ‘Greeks’ in options trading that doesn’t get enough coverage — and that’s Theta.
Theta measures how much value an option will lose each day due to the passage of time as the option gets closer to expiration. This is known as time decay.
You’ve probably heard the saying that options are a wasting asset — wasting in that, with each day that passes a small amount of time value ticks away.

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