Observations & Insight

Twitter’s New Exchange Listing
Spencer Doar – JLN
Can you trade off of Twitter? The Chicago Board Options Exchange and its partner Social Market Analytics (SMA) believe so.

The two firms are partnering on a suite of sentiment-based indexes that use tweet data to generate alpha. The first of the suite, the CBOE-SMA Large-Cap Index (SMLC Index), debuted on July 29. The index is simply published by CBOE at this point, but a tradeable contract may be coming.

Joe Gits, CEO and co-founder of SMA, has been watching and monitoring Twitter for years. Gits has a background in quantitative analytics, and soon after Twitter debuted in 2006, he was fielding queries about harnessing the power of the little blue bird. In early 2009, there were some 2.5 million tweets per day. Today, total daily tweets number half a billion, plenty of which are focused on the markets and current economic landscape. In Gits’ research and efforts to build a company that filters and gleans information from the social media giant, it has become clear Twitter matters to those who trade the markets.

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Lead Stories

Smart Money Going to War With VIX-Obsessed Stock Market Bears
Lu Wang and Joseph Ciolli – Bloomberg
They can’t both be right.
Below the surface of the calmest stock market in five decades, a divergence in sentiment has opened in which institutional investors are surrendering hedges and diving deeper into stocks, while individuals load up on protective options and sell equity funds. Bets are piling up at the fastest rate ever as stocks meander, setting the stage for pain when the sleepy spell resolves.

****JB: “We few, we happy few, we band of brothers…”

Options Volatility Sleeps as Risks Increase
Steven M. Sears – Barron’s
Volatility has all but disappeared from stocks this summer. Is this unnatural calm a prelude to a storm? And, what’s behind a dearth of hedging. Equity volatility, realized and implied, is at extremely low levels, especially with major economic reports, possible interest-rate hikes, and a contentious presidential election on the horizon. Greater volatility would confirm what many investors believe: that the U.S. stock market deserves to trade at a significant risk premium. Yet the market’s grinding advance persists against a backdrop of ultralow interest rates.

****JB: Didn’t someone once say you should let sleeping options lie?

Mexico spends $1bn in annual oil hedge
Financial Times
Mexico has completed its annual oil hedging programme, considered to be the world’s largest sovereign oil derivatives trade, spending $1.028bn to hedge 250m barrels at a price of $38, the finance ministry said.

Were dire Brexit predictions much ado about nothing?
Josh Zumbrun – MarketWatch
It’s early, but data so far suggest the British decision to leave the European Union could be another example of a recurring phenomenon: expert predictions of dire consequences to political decisions that end up proving overheated.
It’s now been two months since British voters on June 23 cast their ballots to exit from the European Union, and it’s becoming unclear if the recession so many feared will materialize — at least in the near term.

The Data Point That Could Bring Volatility Back
Todd Salamone – Schaeffer’s Investment Research
Roughly two months after the Brexit referendum, another event garnered intense focus from traders around the world — the annual central bankers’ meeting in Jackson Hole, Wyoming. A Friday morning speech by Federal Reserve Chair Janet Yellen highlighted the meeting, in addition to comments from other Fed governors.

BigTrends.com Weekly Market Outlook – August 29, 2016
Moby Waller – CBOE Options Hub
Unable to resist the weight of its 9% gain since its late-June low, the S&P 500 (SPX) (SPY) finally started to buckle last week. The index only lost 0.68% for the five-day span, but that was the worst weekly performance since June, and could end up serving as the profit-taking excuse some traders have been waiting for.

Stocks stage a rebound as Wall Street deals with rate-hike prospect
Mark Decamber and Barbara Kollmeyer – MarketWatch
U.S. stocks marched higher, with the Dow industrials looking at a 100-point rally, as Wall Street appeared to become inured to the prospect of an increase of benchmark interest rates in 2016.

Want a Hedge Fund Job? Knowing About Wavelets Improves Your Odds
Saijel Kishan – Bloomberg
Job seekers with MBAs or experience as securities analysts no longer jump to the front of the hiring line. But if you’re nimble with partial differential equations or wavelets, hedge funds want you.

****SD: Good thing I’m not looking for a hedge fund job. I thought wavelets were the byproduct of a good volumizing conditioner.


Why America’s newest stock exchange is preparing for failure
Matt Turner – Business Insider
IEX built its systems from the get-go to compete with one another in an approach borrowed from NASA. IEX calls this approach “Active-Active,” and the simple way to explain it is that there are two boxes full of tech, and each thinks it’s the only box. Whichever one gets there first gets the job, and the second result is ignored.

Changes to the BOX Fee Schedule
Press Release – BOX


Cyber threat grows for bitcoin exchanges
Gertrude Chavez-Dreyfuss – Reuters
When hackers penetrated a secure authentication system at a bitcoin exchange called Bitfinex earlier this month, they stole about $70 million worth of the virtual currency. The cyber theft — the second largest by an exchange since hackers took roughly $350 million in bitcoins at Tokyo’s MtGox exchange in early 2014 — is hardly a rare occurrence in the emerging world of crypto-currencies.


Why an Options Fund Is a Good Idea Now
Lewis Braham – Barron’s
If the Beatle’s Nowhere Man was an investor today, he would buy an options fund. For those who don’t have a point of view on the stock market and know not where it’s going to, writing call or put options on their portfolios can help generate income even if the market goes literally nowhere.

Happy VIX-entines Day
Meredith Kelley Zidek – CBOE Options Hub
The funniest part of my last post was the quote from my last sentence, “…VIX, which I doubt will stay the same every minute from here on out…” because it has basically stayed right where it was at the time of that writing more than a month ago. Spanning 11-13 that day set the tone for the next month, since that’s all it’s done ever since (with the exception of a toe dipped in 14 yesterday), for the next 25 trading days. (*And excepting today as I’ve been sitting here writing this, seeing the return of the fourteens with a vengeance.)

Jackson Hole Has Changed the Game for the Stock Market
Jim Collins – The Street
TheStreet.com founder Jim Cramer has boiled trading down to month-by-month segments, in which the tone for the month is set by the monthly nonfarm payrolls report. As is often the case, Jim has been dead right the past two months, as stronger-than-expected BLS employment reports have pushed the market to strong performances.


Collars Offer Flexible Protection
Gary Delaney – MoneyShow.com
Investors want the best of both worlds. They want upside participation in the market but don’t want to lose their shirt if things go sour. They want protection but don’t want to pay too much for it. Anyone involved in investment decisions is used to addressing these conflicting tensions. The world of equity options is no exception. The use of options as a protective risk management tool is well established but cost can often be a stumbling block.

****SD: Better than starchy collars that offer stiff protection.

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