Observations & Insight

Wrapping it Up
Doug Ashburn – JLN
Today’s newsletter features a snapshot of volatility from several asset classes – equities, oil and gold to name a few – and also includes a bit of a look-back on 2015, as many of our regular resources use this period to publish their year-end reviews.

Today we feature part I of CBOE Options Hub’s 2014 volatility review. Mr. Moran features a series of five charts that nicely sum up volatility, volume, skew and term structure.

Also, we re-feature one of our best MarketsWiki Education videos from this past summer – Steve Crutchfield’s “How to Build an Options Trading System (in Ten Minutes)”.

As a reminder, JLN Options will be going on vacation starting Wednesday, December 24. We will not publish again until January 5, 2014. May your holidays be filled with peace and joy.

Review of Volatility in 2014 (Part 1) – High Volatility and Record Volume in October
Matt Moran – CBOE Options Hub
Looking back on volatility in 2014, certainly October was a key month for U.S. stock-related volatility. Two key volatility indexes that hit their highest daily closes for the year on October 15th – the CBOE Volatility Index (VIX) closed at 26.25 and the CBOE Short-Term Volatility Index (VXST) closed at 31.32 that day.

Steve Crutchfield, EVP at IntercontinentalExchange – How to Build an Options Trading System (In Ten Minutes)

“You’ve got to come up with some numbers that describe the universe based on data that fit that model.”

Steve Crutchfield, Executive Vice President at IntercontinentalExchange, explains the three key components of building a trading system. Beginning with a brief history of the New York Stock Exchange, Crutchfield gives a glimpse of trading activity in its early stages and its evolution into today’s intricate electronic systems. Crutchfield emphasizes that looking at historical data and determining which numbers to pull out from it is a difficult problem to solve, among many other challenges in the trading world today.

Watch the video »

Lead Stories

S&P 500 record runs are small but steady
U.S. stocks’ record runs were the highlight of 2014 with major benchmark indexes averaging about one a week. The S&P 500 index closed at a record each month and is on track to end Tuesday at a new high for the 51st time this year. The S&P 500’s highest ever number of record closes was in 1995 when it gained more than 34% and set records 77 times. This year ranks as the fourth highest.

***DA: I think too many people front-ran the Santa Claus rally that the market needed to shake out the weak hands before the rally could continue. As soon as those same weak hands panic-buy back in, we can have the blow off top followed by the 2015 swoon. You heard it here first.

Why It’s So Tricky to Time Volatility Spikes
Adam Warner, Schaeffer’s Investment Research
I do agree that we will continue to see sporadic shocks in 2015. But, I believe we will see them in 2016 too, as well as 2017, and 2018, and — well, I think it’s safe to say that a year won’t go by without seeing vol shocks. That’s because they happen pretty much every year, two to five times, generally speaking.

***DA: Conditional probability. One has to be right on direction and time. Still working on that one myself.

Oil VIX Is Up 209% and Brazil VIX Is Up 45% in 2014 Y-T-D
By Matt Moran – VIX Views
During the financial crisis of 2008, many investors bemoaned the fact many asset classes fell as the correlations among several asset classes rose. Since 2008 investors have searched for investments that have diversification potential in times of market stress

Crudely interrupted
All of our global equity volatility measures are up, but their increases pale in comparison to their equivalents in the oil markets. At 56.8, the CBOE Oil ETF Volatility Index is at a three-year high and at a massive premium to realized volatility: the decline in oil prices has caused disruptions elsewhere, but the actual volatility of oil price changes has been relatively low. Since the summer, energy prices have just kept on going down.

Opec leader vows not to cut oil output even if price hits $20
Anjli Raval, Oil & Gas Correspondent, FT
Opec will not cut production even if the price of oil falls to $20 a barrel, the cartel’s de facto leader said, spelling out a dramatic policy shift that will have far-reaching implications for the global energy industry.

***DA: What’s here in the June $20 puts?

Gold Holds Loss as Fed Rate Outlook, Dollar Strength Damp Demand
Gold futures fell the most in more than two weeks as a slump in oil cut the appeal of the metal as an inflation hedge. Volatility in the metal rose to the highest since January.
The gauge of 60-day historical volatility reached 18.4, the highest since Jan. 10. Aggregate trading was 22 percent lower than the average in the past 100 days for this time, according to data compiled by Bloomberg.

The Ruble Crisis, Russia, And China: If You Take The King’s Shilling, You Do The King’s Bidding
Russia’s currency crisis, for the moment at least, appears to be quieting down. Equities have been rallying for the past week, and the ruble has recouped some of its most dramatic losses against both the Dollar and Euro. It’s hard to tell whether this is a dead cat bounce or a seriously ill cat bounce, but it at least appears possible that Russia could emerge from the recent volatility in its currency without turning into a Mad-Max style wasteland. Things haven’t fallen apart, at least yet.


CBOE to pass regulatory duties to FINRA
By Tom Polansek, Reuters
CBOE Holdings Inc, operator of the biggest U.S. stock options market, will cede regulatory duties to the securities industry’s largest independent regulator next week, the company said on Monday.

***DA: The Reuters version of a story we reported yesterday. The story quotes the illustrious fraud attorney Andrew Stoltmann, who says “These actions by the CBOE are likely to get the SEC off its back without causing any real pain or material changes.”

Options Trader Alert #2014 – 42 BX Options Announces New Execution Algorithm for Penny Pilot Options and Pricing for Lead Market Makers
Effective Friday, January 2, 2015, pending SEC approval, all Penny Pilot options classes will be executed utilizing the Size Pro-Rata execution algorithm on BX Options. Additionally, the following pricing modifications will apply to BX Options.

Regulation & Enforcement

INSIGHT-Derivatives exchanges prove resistant to regulatory change
By David Henry, Reuters
In December 2013, Hanmag Securities Corp, a small South Korean brokerage firm, lost 46 billion won ($42 million) in a day after a stock option trading algorithm went bad. It was a fatal blow for a company that had just 15 billion won of capital – Hanmag went bust. What happened next rattled regulators around the world: Hanmag defaulted on its obligations, forcing the Korea Exchange’s clearinghouse to tap its emergency funds.

***DA: Until we sort out the algos-gone-wild problem, let us hope clearing houses continue to function properly.

French market regulator opens consultation on grains futures position limits
French market regulator AMF said on Monday it was launching a two-month public consultation on a proposal to introduce position limits and position reporting on Euronext’s Paris-based grains futures and options.

***DA: How will they line up to the U.S. rules that were passed, thrown out by a court order and reproposed?

SEC’s New Investor Watchdog Lays Out Risky Products For 2014
Business Insider
The U.S. securities investor watchdog office on Tuesday unveiled its list of the top products and practices that bedeviled mom and pop investors in 2014. In an annual report on market activities, the Securities and Exchange Commission’s Office of the Investor Advocate said private placements, variable annuities, non-traded real estate investment trusts (REITS) and binary options all presented problems for investors.

***DA: Once again, slot machines failed to make the list.


Pimco Gets Impaled on a Volatility Spike
Streetwise Professor
This is crazy to me: selling massive quantities of volatility when volatility is at very low levels.

***DA: D’oh!

Videocast: VIX tumbles below 15
optionMONSTER (12/23/14)

***DA: 14.8 as of publication time. Merry Christmas.

Low-Volatility ETF Strategies Shine For Now
ETF Trends
Low-volatility stock exchange traded funds are outpacing the benchmark S&P 500 index as conservative plays weathered the market correction in October and kept performing, but some warn of an overcrowded trade.

Interesting TBT Put And Call Options For February 2015
Investors in Proshares UltraShort 20+ Year Treasury (Symbol: TBT) saw new options begin trading this week, for the February 2015 expiration. At Stock Options Channel , our YieldBoost formula has looked up and down the TBT options chain for the new February 2015 contracts and identified one put and one call contract of particular interest.

S&P 500 Q3 2014 Buybacks Increase 25% Over Q2
Share count reductions continue to add a tailwind to EPS,” says Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. “While third quarter expenditures were up 25%, the number of companies reducing their share count declined 13%. Still, over half of the S&P 500 issues reduced their share count with 20% decreasing them enough to impact their year-over-year EPS by at least 4%.

***DA: Story filed under “strategy” as there has been no greater strategy among corporate CFOs than buybacks in terms of maximizing share price.

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