Observation and Insights

Livin’ The High Life: CBOE posts solid 2014, looks to global growth in 2015

The Chicago Board Options Exchange held its annual Chicago press lunch yesterday. Among the highlights of the company’s success in the past year were these:

  • 2014 volume was up 11 percent, to 1.3 billion contracts, outpacing the industry average of 4 percent.
  • VIX options’ ADV was 632,000 contracts, while VIX futures ADV was 201,000.
  • Its SPX Weeklys continued to show great growth, up 38 percent with an ADV of 272,277.
  • CBOE’s shareholder return in 2014 was 25 percent, and the stock hit an all time high of $68 last Thursday.
  • CBOE had total market share of 28.6% compared to 27.5% in December 2013.
  • CBOE & C2 accounted for 30.6% of industry volume (compared with 29.3% in Dec. 2013.

The exchange is “a products company,” according to its CEO, Ed Tilly, and in keeping with that the CBOE launched several new products in the past year. Most recently, the exchange began disseminating volatility index values on three of the CME Group’s FX options contracts: the Dollar/Euro, Dollar/British Pound and Dollar/Yen futures options.

Read the rest of the story here: http://jlne.ws/1BxfNJY

Lead Stories

Swiss central bank roils markets
Jamie Chisholm – Financial Times
Intense volatility is battering markets after traders were caught off guard by a shock shift in policy by the Swiss National Bank.
The Alpine monetary guardian abandoned its ceiling of SFr1.20 against the euro and slashed interest rates to minus 0.75 per cent.
***DA: While we were sleeping this morning, the Swiss National Bank abandoned the 1.20 floor to the euro (EUR/CHF), and the currency skyrocketed 25 percent at one point versus the dollar. Talk about a flash crash. To put it in perspective, that would be about a 4300 point move in the Dow Jones Industrial Average.

Wall Street Just Got Exactly What It Wished For, But It Wasn’t Ready For It
Linette Lopez – Business Insider
Obviously losing money is a bad thing on Wall Street, and everyone’s chalking this bad thing up to a surprising jolt of volatility toward the end of the year.
And this is where the lesson comes in. The thing is, this summer traders were begging for volatility. A market without volatility is like an old ship getting caught in the doldrums — a sea without wind.

Volatility is the Name of the Game to start 2015
Ilan Levy-Mayer – Equities.com
The last few days of 2014 and the first few weeks of 2015 have shown a much larger volatility than what we saw in 2014. Higher volatility equals wider ranges, faster moves, larger moves and then some. That affects day traders who need to adjust their style and adapt to changing market conditions.
From the longer time frame perspectives (days/ weeks) I am looking at a market that has been making new highs for the past six years with very few and minor corrections. Much has been written about quantitative easing.

BofA, Citi and Volatility: Too Little, Too Much, Just Right
Kristen Scholer – WSJ
How much volatility is just right?
That’s an issue that came into focus on conference calls that Citigroup Inc. and Bank of America Corp.’s financial heads held with journalists Thursday.
As The Wall Street Journal reported this week, trading desks at U.S. banks suffered during the last three months of the year  after market movements swung from being too quiet for much of the year to being too sudden and extreme at various points in the fourth quarter.

‘Fear Gauge’ Spikes, Amid Talk of ‘Old Normal’ for Stock Market
Kristen Scholer – WSJ
Markets are catching a case of déjà vu.
Volatility is surging while stocks are pulling back as global growth worries rise. Sound familiar? It should.
The CBOE Volatility Index–often called the market’s “fear gauge”–is at its highest level since mid-December, surpassing a level of 23, and the S&P 500 is 4.0% below its record. This same scenario played out just a month ago when collapsing oil prices, slowing growth and deflation fears sent the VIX above 25 and took the S&P down 5.1% from its all-time high.

As VIX Flares, Europe Likely to Conduct Symphony of Volatility
Chris Dieterich – Barron’s
Volatility is here to stay.
That’s the message from Wall Street as the CBOE Volatility Index climbs to a one-month high and the S&P 500 slides toward its ninth decline in 11 sessions. The VIX, an options-based measure of expectations for future price swings in the S&P 500, was recently up 8.9% to 22.37. It tends to rise when stocks fall, and vice versa.

How Can We Escape the Overbought VIX Cycle?
Adam Warner – Schaeffer’s Investment Research
We interrupt this VIX-plosion to give you a few factoids about said VIX-plosion. The series of swings and triple-digit Dow moves up and back (mostly back) help feed the impression that realized volatility has hit the stratosphere. And it has surely lifted, but not really all that high just yet.

What The VIX Does, And Doesn’t, Represent At Current Levels
Tom Cleveland – Investing.com
It’s 2015; a new year and a time for reflection, especially on what the future might bring in the world of currency trading. The current long-term thinking is that the U.S. dollar will dominate the forex arena, much as it did in 2014, but that view is for the longer term.
The near-term view is in doubt, although there is no other market sector across the globe that is presently pounding the drum to signify its nascent transcendence. Most analysts have put aside their foggy crystal balls and resorted to searching the past for clues of what might come. Some of these efforts defy what could be termed credulity.

World’s Top 10 Hedge Fund Firms (JPM,OZN)
Shobhit Seth – Investopedia
Hedge funds are an advanced level portfolio of investments, containing a mix of leveraged derivatives, as well as long and short positions of domestic and international markets, based on advanced methodologies. These funds are intended for sophisticated high-risk, high-return investors.


Will CBOE expand overseas?
Lynn Marek – Crain’s Chicago Business
CBOE Holdings has been ringing up sales abroad without actually placing employees anywhere outside the U.S., but its Chicago-centric approach could change sometime soon.
“We’re going to need to broaden,” the company’s CEO, Ed Tilly, told reporters when asked about the topic at the company’s annual media lunch yesterday. “There are so many huge advantages to being in any home market. They will certainly outweigh the things we have to overcome—part of a great growing pain.”

CME raises bid for GFI Group to $5.60 a share vs $5.25
Ciara Linnane – MarketsWiki
CME Group Inc. CME, +0.45% said it’s raising its bid for privately-held GFI Group to $5.60 a share from $5.25 a share, payable in a mix of CME stock and cash. The new offer represents an 80% premium over GFI’s closing price on July 29, the last day of trading before CME launched its bid.

Nasdaq plans challenge to CME and ICE in energy derivatives
John McCrank – Reuters
Exchange operator Nasdaq OMX Group is considering entering the energy derivatives market in a challenge to CME Group and Intercontinental Exchange Inc, according to documents seen by Reuters.
The move, currently in the consultation phase, but intended to be rolled out this year, would see Nasdaq introduce energy futures and options products based on key oil, natural gas, and U.S. power benchmarks, according to the documents.

CME Group Posts Record in Energies
Via Email
–  Yesterday (1/14/15), we had an overall NYMEX energy complex combined futures and options trading volume record of 3,110,130 contracts. The prior overall energy record was 2,809,743 contracts on May 5, 2011.
–  Additionally, a record 2,496,596 combined NYMEX energy futures and options traded on Globex yesterday (1/14/15), surpassing 2,203,788 contracts traded earlier this week (1/13/15). Prior to this week, the previous record for energy complex volume on Globex was 2,118,534 contracts traded on May 5, 2011.
–  Of the overall 3.1 million energy contracts traded yesterday, 2,598,426 were futures and 511,704 were options.
–  Of the nearly 2.5 million energy contracts traded on CME Globex, 2,330,430 were futures and 166,166 were options.

Regulation and Enforcement

U.S. House Approves Legislation Easing Dodd-Frank Provisions
Cheyenne Hopkins – BloombergBusinessweek
House Republicans made one of their first attempts in the new Congress to roll back Dodd-Frank constraints on Wall Street, in what’s poised to become a recurring battle with Democrats who oppose changing the law.

SEC Charges UBS Subsidiary With Disclosure Violations and Other Regulatory Failures in Operating Dark Pool
Press Release – SEC
The Securities and Exchange Commission today charged a subsidiary of UBS with disclosure failures and other securities law violations related to the operation and marketing of its dark pool.
UBS Securities LLC agreed to settle the charges by paying more than $14.4 million, including a $12 million penalty that is the SEC’s largest against an alternative trading system (ATS).


U.S. stock investors try to manage volatility with covered calls
Saqib Iqbal Ahmed – Reuters
Surging U.S. stock-market volatility ahead of the earnings season is leading traders to lock in some gains in some big-cap companies that recently hit all-time highs, strategists said on Wednesday.
Investors have grown worried about weak global growth and falling commodities prices, and drops in the S&P 500 stock index reflect that concern. The CBOE Volatility Index, or VIX, has jumped above 22, a sign of elevated anxiety.

4 ways to play market volatility
Jacob Pramuk – CNBC
Volatility has ruled markets this week and stocks extended losses to a fourth straight session on Wednesday. The CBOE Volatility Index jumped about 4.5 percent, reflecting investor uncertainty in the current climate.
Choppy trading environments necessitate increased scrutiny, and traders on CNBC’s “Fast Money” laid out some of their best protective plays amid high volatility.

Options Education

Five Minutes with Mark Omens on CME’s New Futures Institute
Sarah Rudolph – John Lothian News
On Wednesday, the CME Group announced the launch of a new education initiative, the Futures Institute, an online platform for education on futures and options on futures. It offers live instruction, trading simulation, interactive training modules, and market research. JLN spoke with Mark Omens, senior director and head of retail sales for CME Group, to find out what stands out about the new program and who can benefit.
Read more: http://jlne.ws/1zil7kO

How a Protective Collar Works (AAPL)
Elvis Picardo – Investopedia
A protective collar consists of a put option purchased to hedge the downside risk on a stock, plus a call option written on the stock to finance the put purchase. Another way to think of a protective collar is as a combination of a covered call plus long put position.


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