JLN Options: RadioShack Jumps as Much as 33% After Call Options Trade; Derivatives Worldwide Hit 710 Trillion, According To BIS Study; Part II: Facts from OCC, U.S. Options Exchanges Pre- and Post-Trade Risk Principles

May 29, 2014

Observations and Insight

Index Evolution: Guillermo Cano Looks at the New Generation of Equity Indexes
JohnLothianNews.com
Equity indexes have come a long way over the past few decades, says Guillermo Cano of Russell Indexes.

While market cap-weighted indexes still capture the lion’s share of volume, new investment choices include such things as sector weighting, factor modeling and so-called “smart beta ” which aims to blend active and passive investing.

Watch the video »

MarketsWiki World of Opportunity Summer Intern Series Goes to London
John Lothian & Co. is pleased to announce the MarketsWiki World of Opportunity Summer Intern Education Series is coming to London on July 1st and 2nd, 2014 with the generous support of the CME Group
jlne.ws/1hxS93g

***JK: For employers with interns, please contact John to get them on the list. It’s a great event, and great for your interns’ brains. John is at johnlothian@johnlothian.com

Lead Stories

RadioShack Jumps as Much as 33% After Call Options Trade
Callie Bost and Matt Townsend – Bloomberg
RadioShack Corp. (RSH), the struggling electronics retailer, jumped as much as 33 percent after a trader spent more than $600,000 buying bullish options.
About 20,000 calls expiring in October with a strike price of $1.50 were purchased at 10:25 a.m., according to Trade Alert LLC. The stock then surged, reaching $1.75 a share in the biggest intraday advance since at least 1980. As of 12:14 p.m. in New York, the shares were up 18 percent to $1.56.
http://jlne.ws/1klgnO6

Derivatives Worldwide Hit 710 Trillion, According To BIS Study
Fabrice Drouin Ristori – ValueWalk
The Bank for International Settlements (BIS) just published a statistical study on the amount of derivatives worldwide at the end of 2013, and they reach the astronomical amount of $710 Trillions ($710,000,000,000,000). For comparison purposes, the United States GDP in 2013 amounts to $16 Billion, or 44 times less. And this mass of derivatives beats by 20% the preceding record, dating just before the 2008 crisis… We hear a lot about bubbles these days, in the stock market, the bond market or in the commodities market, but this one is without a doubt the greatest one.
http://jlne.ws/1kliktT

Part II: Facts from OCC, U.S. Options Exchanges Pre- and Post-Trade Risk Principles
The Options Insider
Earlier this week, here at The Options Insider we shared some facts with you about the OCC and the U.S. options exchanges adoption of pre- and post-trade risk control principles. They have been designed to enhance the monitoring of trading activity on a real-time basis and reduce the risk of errors or other inappropriate activity that poses a material risk of significant market disruption.
In this second part, we present some additional facts to you about this initiative regarding activity-based protections and kill switch protections.
http://jlne.ws/1hhisAa

What’s Wrong with This Picture?
Plunging bond yields, depressed VIX and record stock indexes don’t fit—until you factor in the Fed.
Randall W. Forsyth – Barron’s
Two aspects of the current investment landscape have befuddled the best and brightest this year: the steady decline in bond yields and the collapse of volatility. Could the two be opposite sides of the same coin?
Amid much head scratching, the yield of the benchmark 10-year U.S. Treasury note fell to 2.43%, down 60 basis points (0.6 percentage point) from year-end and the lowest since June 2013. Meanwhile, the VIX — the CBOE Volatility Index on Standard & Poor’s 500 index options — was in the very subdued, mid-11 range.
http://jlne.ws/1poJyaW

New S&P 500 End-of-Month Options to Launch in July
Matt Moran – CBOE Options Hub
On July 7 CBOE plans to add new S&P 500 End-of-Month Options to its SPX options product line in response to requests from asset managers who want to more precisely match SPX option expirations to end-of-month fund cycles and fund performance periods.
CBOE Holdings CEO Edward T. Tilly noted “End-of-Month options represent another dimension to our extensive S&P 500 Index options complex, which includes our flagship SPX contract, SPX End-of-Week, SPX End-of-Quarter and SPX LEAPS contracts.
http://jlne.ws/1hhkdgU

Your Go-To Guide for the Latest Volatility Updates
Examining the price action for three of the Street’s volatility vehicles
Adam Warner – Schaeffer’s Investment Research
So, what else is happening across our volatility world in these days of Extremely Low CBOE Volatility Index (VIX)?
Well, the CBOE Russell 2000 Volatility Index (RVX) isn’t exactly exploding, either.
http://jlne.ws/1hhl5C5

Market rally continues despite low volatility
Lawrence G. McMillan – MarketWatch
 The broad market, as measured by the Standard & Poor’s 500 Index — as well as the Value Line Index, the NYSE Index, and the Dow Jones Transportation Average — broke out to new highs. This time, the breakout quickly extended with a strong second day, but now it’s appearing to run out of gas.
http://jlne.ws/1iwtNXG

Videocast: New VIX strikes begin
optionMONSTER
http://jlne.ws/1iwtfBa

Listed derivatives trading back on the rise
Anish Puaar – Financial News
The latest adjusted figures from the World Federation of Exchanges, which cover trading across 51 trading venues, were boosted by the prospect of tapering in the US, which helped drive a 13.5% rise in the number of interest-rate contracts traded to 3.3 billion and increased trading of commodity derivatives in mainland China, where contract volume grew by 39%.
http://jlne.ws/1iwqYpQ

What’s the Problem with Leveraged ETFs?
Sorting out their ‘Fundamental Flaw’
Joseph Cafariello – Wealth Daily
Despite being a tiny part of all investment choices, leveraged exchange-traded funds may have the potential to destroy the entire investment market – so warn some notable investment fund managers.
For one, Larry Fink, CEO of Black Rock Inc (NYSE: BLK), the largest investment fund company in the world with over $4.3 trillion under management, warned investors yesterday that leveraged ETFs “have a structural problem that could blow up the whole industry one day… We’d never [offer] one,” he rejected.
http://jlne.ws/1iwry6M

Exchanges

BATS Exchange Unveils New Pricing and LMM Program for Listings Business
Press Release (BATS)
BATS Exchange, a leading U.S. equities exchange operated by BATS Global Markets, today announced new pricing for its U.S. listings business.
With the new pricing, exchange-traded products (ETPs) that trade more than 400,000 shares per day will be eligible for a free listing on BATS Exchange. BATS had previously offered free listings to any ETP that traded more than 2 million shares per day. Under the new pricing, 223 ETPs market-wide will currently be eligible for a free listing on BATS.
http://jlne.ws/1hhh3JP (PDF)

CBOE To Launch SPX End-of-Month Options In July
Press Release (CBOE)
Chicago Board Options Exchange, Incorporated (CBOE) announced today that on Monday, July 7, it plans to introduce PM-settled, End-of-Month options series (EOM) — with expiration dates falling on the last business day of the month — for its S&P 500 Index (SPX(SM)) options.
CBOE is adding SPX EOM options to its SPX options product line in response to requests from asset managers who want to more precisely match SPX option expirations to end-of-month fund cycles and fund performance periods. 
http://jlne.ws/1hhgdgq

Eurex to Launch FX Contracts in July
Marina Daras – Waters Technology
Eurex, the German exchange operated by Deutsche Boerse, has announced it will offer foreign-exchange (FX) futures and FX options on six currency pairs beginning on July 7 2014.
http://jlne.ws/1kORlvh

Just how open is that automated exchange?
Charles J. Hawkins and Brad Wilson – Lexology
Chicago Board Options Exchange, Inc. v. International Securities Exchange, LLC
Addressing allegations that a lower court made erroneous pretrial rulings regarding the nature of the accused product, the U.S. Court of Appeals for the Federal Circuit affirmed a lower court’s judgment of non-infringement, finding that the lower court did not improperly limit the product that could be accused of infringement.  Chicago Board Options Exchange, Inc. v. International Securities Exchange, LLC, Case No. 13-1326 (Fed. Cir., Apr. 7, 2014) (Reyna, J.).
http://jlne.ws/1hhiUym

Miami International Holdings Announces Appointment of Paul V. Stahlin, Former Chairman of the AICPA, to Its Board
Press Release (MIAX)
Miami International Holdings, Inc. (MIH ), the parent holding company of the MIAX Options Exchange (MIAX), announced today that Paul V. Stahlin, former Chairman of the American Institute of Certified Public Accountants (AICPA), has been appointed to the Company’s Board of Directors. Mr. Stahlin will also serve as Chairman of the Audit Committee of MIH.
http://jlne.ws/1a7v713

Launch of stock index futures option trading soon
Wu Yiyao – ChinaDaily
Zhang Shenfeng, head of China Financial Futures Exchange (CFFEX),said in Shanghai on Wednesday that the exchange has been pushing forward the launch of stock index futures option trading and will introduce such products as soon as possible.
http://jlne.ws/1hhaMOz

London Stock Exchange CEO Eyes U.S. Expansion
Phil Albinus – Traders Magazine
The British are coming.
According to a recent report in the Wall Street Journal, the chief executive of London Stock Exchange Group said that his exchange and clearing company needs to expand into the U.S. markets. The Journal revealed that the UK bourse was in bids to acquire Seattle-based stock index and asset-management business Russell Investments.
http://jlne.ws/1klhM7g

Technology

Is FIX Protocol Use Declining?
George Kledaras – WallStreet & Technology
FIX may be the dominant standard for buy-side to sell-side electronic trading around the world, but binary protocols such as OUCH have gained traction among high-speed traders. Now the rise of Bitcoin and crypto currencies is fueling the next stage of evolution.
http://jlne.ws/1hhj3Sp

Strategy

Options Strategies for the Goldilocks Market
Minyanville
A host of indices created by CBOE Holdings (NASDAQ:CBOE) that employ options strategies are hitting all-time highs this week. It certainly doesn’t hurt that the S&P 500 (INDEXSP:.INX) and Dow Jones Industrial Average (INDEXDJX:.DJI) are making new record highs themselves.
Thanks to the low-volatility Goldilocks environment created by the steady grind higher, these indices are actually outperforming the benchmark indices through the harvesting of options premium.
http://jlne.ws/1hhkgJF

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