Observations & Insight

Bits & Pieces
By John J. Lothian

It has been a week of market closures, some planned, others unplanned. First, we shut down the futures pits at the CME Group in Chicago and New York. Then the NYSE decides to take part of the day off when it discovers some issues with a software upgrade, according to reports.

I am signed up for market status texts reports from the NYSE and my phone started exploding with messages yesterday morning as NYSE started to discover its problems.

In other news, my friends at the Pathway to Adventure Council of the Boy Scouts of America report that Advantage Futures Trading Tech 300 kickoff merit badge fair day on July 15 has been sold out. We have 24 young men signed up for the chess and public speaking merit badges to be led by Advantage’s Terry Duffy. This is not the CME’s Terry Duffy, but still Terry Duffy.

The word is that GlenStar Properties, which owns the CBOT Building and is a MarketsWiki partner level sponsor, will be offering the engineering, electricity and search and rescue merit badges for the Trading Tech 300 program in August. Details and sign up to start soon.

I will be away at summer camp with my Boy Scout troop the week of July 18 to 24. With 9 new scouts in my troop, this will be quite the challenging week.

Finally, don’t forget to sign up your interns or yourself for our Summer Intern Education series in New York and Chicago. Details are available on www.marketswikieducation.com

Lead Stories

Short Sales Are at Their Highest Level Since the Financial Crisis
Lu Wang – Bloomberg
U.S. equity bears, mired in the longest streak of losses in 25 years, are getting bolder.
Unfazed by three years of money-losing bets against stocks, short sellers increased their bearish wagers in June to the highest level since the financial crisis, according to data compiled by the New York Stock Exchange. For now the move has proved well-timed as a Goldman Sachs Group Inc. index of most-shorted stocks slumped 10 percent over 10 days through Wednesday, one of the worst declines since 2009.

Fed Increase Little More Than Coin Flip for Derivative Traders
Liz McCormick – Bloomberg
Unrest in China and Greece looms large with money-market derivative traders who now see little more than a coin flip’s chance that the Federal Reserve will lift interest rates this year.
Fed funds futures give a 54 percent probability that the central bank will lift rates in December, down from 59 percent before the Fed on Wednesday released the minutes of its June policy gathering. At the start of the month, the likelihood of the central bank lifting its near-zero benchmark rate this year was nearly 70 percent. The chance of a September hike is now 21 percent.

Chinese ADRs continue to fall — hedging demand soars
Tariro Mzezewa and Saqib Iqbal Ahmed – Reuters
The weeks long tumble in the Chinese stock market is continuing to spill over into China-focused exchange traded funds and ADRs in the United States, boosting demand for hedging in the U.S. options market.
Despite Beijing’s best efforts, China’s main stock indexes have lost about a third of their value since mid-June, and Chinese shares trading in the United States are feeling the pinch.

Market Turbulence Worries BRICS as Volatility Stalks Oil, China
Andrey Biryukov and Anna Andrianova – Bloomberg
The BRICS group of developing nations, meeting in Russia to bolster ties, said they’re disturbed by the turbulence that’s roiled global markets from energy to stocks.

Is the big money getting nervous about stocks?
Alex Rosenberg – CNBC
As the outlook for stocks becomes increasingly uncertain, there are signs that unlike during recent geopolitical crises, the big money is starting to get nervous.
“There is a sign that more fear is creeping into the market, and we’ve been doing the Greek dance for—God, I forgot how many years now. But what we’re seeing is elevated levels in indexes that were not elevated in the past, so we’re seeing people move into safer assets,” said options expert Dennis Davitt of Harvest Volatility Advisors.

Greece Too Distressed for Distressed Funds as Default Looms
Luca Casiraghi and Sally Bakewell – Bloomberg
Greece has become too distressed for distressed-debt funds.
Trading in the country’s debt and derivatives has almost stopped, even after sovereign, financial and corporate bonds dropped as much as 67 percent in a month. That’s the type of slump that would usually attract investors seeking to profit from possible defaults.

Are We In the Eye of the Fear Storm?
Adam Warner – Schaeffer’s Research
U.S. stocks enjoyed a low-volatility grind higher during the Chinese stock explosion, so should we really worry about China’s recent selling spree?

The Cost of Insuring Against a Commodities Crash Is Rocketing
Thomas Biesheuvel – Bloomberg
China’s stock slump has played havoc with the commodities market as traders fret that the economy driving global demand for raw materials is about to tank.

Gold ETFs Fail The Volatility Test
David Fabian – InvestorPlace
In my experience as an investment advisor, gold bullion and other precious metals are often very polarizing asset classes to own.
You either love gold because you’re worried about inflation, currency manipulation and market volatility, or you hate it because you have no idea when it actually works to hedge those themes.

MktOutperform – Longest pullback since 2012 (48 days) but not even 5% and $VIX hasn’t even crossed above 20
Charlie Bilello – StockTwits
Longest pullback since 2012 (48 days) but not even 5% and $VIX hasn’t even crossed above 20.

***JB: At the link is just a table of S&P corrections >5% since 2009. Kind of interesting.


Nadex Q2 2015: Second Consecutive Quarter of Record Volumes
Press Release
The North American Derivatives Exchange (Nadex) today announced that the volume of binary options and spread contracts traded on the exchange in the second quarter of 2015, versus Q2 of 2014 rose 53%, in line with prior quarters. This marks the tenth of the last eleven quarters to yield record volume and highlights the continued growing popularity of exchange-traded binary options.

Euclidean Trading links to ICE interest rate options
Luke Jeffs – Futures & Options World
Tech start-up Euclidean Trading has extended its pricing service to include options on the Intercontinental Exchange, marking the New York-based start-up’s second major exchange in less than three months.
Euclidean, which started life in early 2014, said it is now pricing short sterling options traded on ICE, which replicates the service the firm started offering to clients in April for interest rate options traded on the CME Group.

BOX Price Improvement Activity for June
Press Release
In the month of June, price improved contracts on BOX Options Exchange (“BOX”) averaged 204,457 per day. Price improvement versus the prevailing NBBO for contracts submitted via BOX’s price improvement auction, PIP, averaged $342,513 per day, while total savings to investors in June was $7.53M. With this, BOX has saved investors over $639M since its inception in 2004. Overall average daily trading volume on BOX in the month of June was 332,146 contracts.

Regulation & Enforcement

Derivatives market concerned by trade reporting costs
Jon Watkins – The Trade
Market participants on both sides of the Atlantic are concerned about the increasing costs of staying compliant with OTC derivatives trade reporting requirements.
A survey by Sapient Global Markets shows that 61% of the buy- and sell-side participants believe the costs associated with trade reporting will rise by a minimum of 25% over the next two years.


NYSE, SEC Suspect Software Update Triggered Trading Halt
David Michaels – Bloomberg
A computer malfunction that knocked out trading at the New York Stock Exchange for more than three hours Wednesday probably stemmed from a software update that went awry, said two people briefed on a preliminary review.
The NYSE must now verify the cause and report its conclusions to the U.S. Securities and Exchange Commission, said the people who asked not to be named because the inquiry isn’t public. The SEC will use those findings to investigate whether any rule violations occurred, the people said.

Why didn’t NYSE switch to its secret servers in Chicago?
Chuck Goudie – abc7chicago.com
The ABC7 I-Team has been looking into Wednesday’s glitch on the stock market. There are questions about why the New York Stock Exchange never switched over to its back-up computer facility in Chicago.

Glitches Galore: A Brief History Of Technical Problems On Wall Street
Krishnadev Calamur – NPR
Wednesday’s computer-related problems on the New York Stock Exchange that halted trading for more than three hours was not a one-off. Over the years, stock exchange failures have been attributed to everything from technical glitches to a stray squirrel.


VIX Option Trade Into Expiration
Russell Rhoads – CBOE Options Hub
CBOE and the CBOE Futures exchange plan on launching VIX Weeklys options and futures respectively over the next couple of months. Usually when new markets start trading we have to do a little wait and see with respect to strategies that large traders are implementing. However, with VIX Weeklys we have over 100 expirations since VIX options were launched and we can look to trading in VIX options and futures that have occurred near expiration.

Bullish, Bearish, and Neutral Trades from Today
Russell Rhoads – CBOE Options Hub
One of the fun parts of working at the Options Institute is looking into how large traders react to different market environments. Since today was a pretty exciting day in the markets I decided to look at block trading activity from the end of the day today. The result is a bullish, bearish, and neutral trade executed respectively in the Russell 2000, S&P 500, and VIX option markets today.


Covered call proximity — identifying the best choice
Michael Thomsett
Covered Call Proximity is the determining factor of the short call’s value. The closer the underlying price is to the strike, the greater the option’s price response to the price movement in the stock. The farther the proximity, the less responsive premium levels will be. Those wanting to avoid or defer exercise may shy away from close-proximity positions or, worse yet, may select OTM positions expiring much later. Both of these decisions adversely affect outcome. You are likely to realize many more profits by focusing on close-proximity, soon-to-expire strikes.

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