JLN Options: The 'Black Swan Index' is on a scary flight higher; Steady Road Takes Its Toll; Option Traders Are the Most Bullish They've Been in 3 ½ Years

Jun 24, 2014

Lead Stories

The ‘Black Swan Index’ is on a scary flight higher
Where some investors see nothing but rolling green fields and placid summer lakes, others see black swans circling high above. Such is the picture painted when comparing the widely followed Chicago Board Options Exchange Volatility Index—the market’s “fear” gauge— and its sister measure, the Skew, aka the “Black Swan Index,” which charts, well, lots of fear. (The black swan is a metaphor for a highly unusual occurrence and took on added significance in the market following Nassim Taleb’s 2007 book, “The Black Swan.”)

Steady Road Takes Its Toll
Traders are sticking to a losing bet that a placid stretch for stocks is coming to an end.
The CBOE Volatility Index, or VIX, an options-based measure of expected stock-market swings, last week hit its lowest level since 2007. The Dow Jones Industrial Average has gone 32 months without a 10% decline, the fifth-longest run on record. The S&P 500 hasn’t closed up or down 1% in 46 days, the longest stretch since 1995. http://jlne.ws/1m715x6
***DA: VIX had a nice 12 percent pop on today’s equity market break. 

Option Traders Are the Most Bullish They’ve Been in 3 ½ Years
In the last few months, as the S&P 500 has shot to new highs and has moved within a few percentage points of the 2,000 level, the sentiment indicators have moved toward bullish extremes. The most recent indicator to reach such a significant bullish extreme is the CBOE Equity Put/Call ratio. The 21-day moving average for the ratio dropped to 0.5224 last week, the lowest the moving average has been since January 2011.
***DA: When everyone moves to the same side of the boat, expect it to capsize soon.

The VIX And Volatility
The VIX is supposed to be a forward-looking measure of volatility, but as it turns out, it may be a better indication of where things have been than where they’re going.

Short-lived correction threatens overbought market
One of the lessons that an experienced trader learns is that a strong market can continue to be strong even if it’s overbought. John Maynard Keynes said it another way, postulating that the market can remain irrational longer than you can remain solvent.

This Is What It Looks Like When The Lights Go Out On Wall Street 
We have gone 46 days without a 1% move in the S&P 500. That is, 46 days without a 1% move up or a 1% move down. If the S&P 500 doesn’t break this streak today, it will tie for the second-longest streak since 1993. The current streak is already the longest since 1995. http://jlne.ws/1lNx0aj
***DA: Make that 47. Today’s 12-point break in the S&P pushed the VIX up 12 percent, but was a mere 0.64 percent break.

Brazil Currency Volatility Falls to a Year Low Amid Intervention
Brazil’s currency volatility dropped to a one-year low amid speculation the central bank will sustain the pace of its program to support the real. Three-month historical volatility fell to 10.63 percent at 4:32 p.m. in Sao Paulo, the lowest since June 2013. The currency retreated 0.3 percent to 2.2259 per U.S. dollar.

Crude Oil Volatility To Continue, Platinum Exposed To Strike Deal
Daily FX
Crude oil may be in store for further volatility as ongoing unrest in the Middle East keeps traders on edge. Meanwhile, gold could resume its upward trajectory on a weaker greenback, if the reserve currency continues its slump alongside anemic levels of volatility. Also in the precious metals space; platinum and palladium may be vulnerable as newswires report a resolution to the South African mining workers strike is near.

Regulation & Enforcement

Brussels looks at levy to fund European financial watchdogs
Financial Times
Europe’s financial watchdogs could be independently funded through a private sector levy and given new responsibilities for policing key market infrastructure, according to a Brussels report examining potential reforms.

Authorities subpoena Dean Foods in insider trading inquiry
Federal authorities have stepped up an ongoing insider trading investigation by subpoenaing Dean Foods for information regarding activist investor Carl Icahn, sports gambler William Walters and professional golfer Phil Mickelson, according to a news report.


Ultra-low Latency HFT Options Trading System Goes Live
Argon Design, a design services company specializing in complex digital systems announced today that it has developed an ultra-low latency financial trading system for a proprietary trading house doing latency arbitrage on one of the leading exchanges in the Americas.


Run Goldman’s Screen Play With Options
Despite stock indexes at record highs and historically low options volatility, the stock market keeps advancing up a “wall of hatred.” That’s how Weeden’s strategist, Michael Purves, aptly described investors’ dilemma of facing a bull market that’s run over five years but having few, if any, attractive alternatives. Goldman Sachs’ portfolio strategists are pointing clients to opportunities among cyclical stocks, rather within defensive sectors, which investors have bid up, apparently in anticipation of a long-predicted market correction (which never seems to arrive).

Hedging Provides Relatively Cheap Insurance For Volatility ETPs
Seeking Alpha
Volatility doesn’t always go the way you think it is going to go. Many volatile ETPs have proven this over the last two months. I have spoken to users who confided losses of over 40% and are still hanging on, hoping to gain back part of their investment. I never wish that feeling on anyone. In my early naive days of trading volatility, I too made some of the same mistakes.

Trading the World Cup
Adam Warner – Achaeffer’s Outside the Box Blog
Way back in the Dark Ages — the 1990s into 2001 — I was a market maker on the American Stock Exchange (AMEX). If you wanted to find out exact numbers on your trading, you had to wait until your official “sheets” came out, generally the next morning.


Study finds flaws in ‘traffic light’ labels on financial products model
Professional Adviser
Financial products carrying a ‘traffic light’ labelling system to represent some of their attributes – such as historical average return – would create a false sense of security among investors, a study has concluded. 



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