JLN Options: The Rise of the VIX ETP; Plunging Stocks Push Volatility to Biggest January Gain: Options; BATS, No. 2 in stocks, considers second U.S. options exchange -CEO

Feb 4, 2014

Observations and Insights

The Rise of the VIX ETP
Catherine Clay – Livevol, CEO

As the VIX heads toward the 20 mark, it is fitting to wish a Happy Birthday to two VIX ETPs: VXX and VXZ. These five-year-old volatility products made their debut in January 2009, and have generated a tremendous amount of investor attention and interest.

As most JLN readers know, the VXX and VXZ provide exposure to equity market volatility through the CBOE VIX futures. VXX offers volatility exposure to a daily rolling long position in the first- and second-month VIX futures, while the VXZ focuses on the mid-term futures contracts.
 
Since the introduction of these two straightforward products, additional VIX ETPs have been launched to provide exposure to various other aspects of volatility. Some of the more recent products, for example, seek to capture multi-legged strategies with both long and short components. These multi-legged VIX ETPs include products that dynamically allocate a long volatility position to a long S&P 500 position (such as PHDG and VQT), hold a small position of VIX out-of-the-money calls (VIXH), and have either a fixed (XVIX) or variable (XVZ) short-term leg balanced against a long mid-term leg.

Read More >>> http://jlne.ws/1ipVl35

Lead Stories

Plunging Stocks Push Volatility to Biggest January Gain: Options
Nikolaj Gammeltoft and Callie Bost – Bloomberg
Investors snapping up insurance against stock losses after $1 trillion was erased from U.S. equity values have pushed the cost of options to a record increase for the start of a year.
http://jlne.ws/1brqYqO

BATS, No. 2 in stocks, considers second U.S. options exchange -CEO
John McCrank – Reuters
BATS Global Markets, which became the No. 2 U.S. stock market after closing its merger with Direct Edge on Jan. 31, is looking to open its second U.S. options exchange, chief executive Joe Ratterman said in an interview on Monday.
http://jlne.ws/1emUmkS
** Let’s make it a baker’s dozen. When was the consolidation of options exchanges suppose to start happening again? – CC

Markets now fear US economy chilled by more than weather
Patti Domm – CNBC
Weak U.S. manufacturing data, on top of more news of slowing activity in China, sent stocks into a tailspin and signaled to some traders that the correction could be deeper than they expected.
http://jlne.ws/1ipY24E
** What’s chilly is the retail sales figures – a flat year-over year reading in the ICSC Chain Store Sales is awful. Is it really just the weather? – CC

Wall Street suffers worst drop since June after weak data
Chuck Mikolajczak – Reuters
U.S. stocks slumped on Monday, with the S&P 500 suffering its worst drop since June, after weaker-than-expected data on the factory sector in the world’s largest economy provided investors with the latest reason to move away from riskier assets.
http://jlne.ws/1ipZ1Sn

U.S. Stocks Rebound After Selloff
Kaitlyn Kiernan – The Wall Street Journal
Stocks bounced back after starting the week with a sharp loss, as investors bided their time ahead of the key U.S. employment report later in the week.
The Dow Jones Industrial Average added 44 points, or 0.3%, to 15417 in midafternoon trading. On Monday, the Dow tumbled 326 points, or 2.1%, the biggest one-day selloff in more than seven months, on growing concerns over a weakening U.S. economy.
http://jlne.ws/1iq2fFe

VIX – Doomsday Scenarios Revisited; It’s the Volatility of VIX That’s Our Signal, Not the VIX.
Ophir Gottlieb – The Options Insider
How confident are you that the market will not only stay at this level of risk, but will reduce substantially all the way though April 2014? The option market reflects a great deal of comfort; a new equilibrium, a relaxed and quiet equilibrium. Is there an event in the near future (before April 2014) that may be evidence to the contrary? If you said no… think harder…
http://jlne.ws/1iq0kkh

Breaking Down the VIX Hysteria
Adam Warner – Schaeffer’s Investment Research
As ugly a market as we’ve seen this past week and a half, the volatility market has been even uglier. Or better-looking, depending on your perspective. Quite simply, the CBOE Volatility Index (INDEXCBOE:VIX) and its cavalcade of offshoots have moved higher beyond where the moves in the stock indexes would suggest.
http://jlne.ws/1iq2wbv

The VXX Is In the Same Place as It Was in October
Andrew Giovinazzi – The Options Insider
The ISM report was not great yesterday.  On the bright side, bad news is bad news again.  Should stocks be at an all-time high with weak economic numbers?  The answer is probably not.
http://jlne.ws/1iq1o7G

The Chicago VIX-Sensex tango
Krishna Merchant – LiveMint
The S&P BSE Sensex and CBOE (Chicago Board Options Exchange) Volatility index, or VIX, have a strong negative correlation (see accompanying chart). In the past, whenever there has been a sharp rise in the VIX, the Sensex has declined. VIX represents the US markets’ expectation of near-term volatility and is calculated using prices investors are willing to pay for S&P 500 index options.
http://jlne.ws/1iq0VCv

Flight To Safety May Serve As Prelude To Flight To Quality Stocks
Scott Martindale – Seeking Alpha
Stocks continued last week to seek some firmer footing, as prices found some support and volatility hit some resistance, and a flight to safety of global capital benefited long-term Treasury bonds — the very assets that are supposed to be selling off in a secular “Great Rotation” into equities.
http://jlne.ws/1iq1cVV

Private exchanges may drive more informed investors to public markets
Massachusetts Institute of Technology (via ScienceDaily)
A “dark pool” may sound like a mysterious water source or an untapped oil well. In reality, it’s a finance term: Dark pools are privately run stock markets that do not show participants’ orders to the public before trades happen. They are a growing presence in stock trading, now representing at least one-eighth, and possibly much more, of all stock trading volume in the U.S.
http://jlne.ws/1ipXwn2
** This article about the effect of dark pools on price discovery is definitely worth the read – CC

BATS-Direct Edge’s Market Share Just Shy of NYSE’s
Bradley Hope – The Wall Street Journal
The merger of upstart exchanges BATS and Direct Edge, which closed last Friday, was expected to create the second-largest U.S. equity exchange as measured by average daily trading volume behind the New York Stock Exchange.
http://jlne.ws/1ipWS94

Exchanges

Volumes up but top US exchanges drop market share
Richard Henderson – The Trade USA
BATS Global Markets and the New York Stock Exchange (NYSE), now the two largest US equity exchange operators, both lost market share in January despite strong overall trading volumes.
http://jlne.ws/1ipWFTl

Eurex FX derivatives to launch ‘by summer’
Robert Mackenzie Smith – FX-Week
After delays, Eurex may launch FX futures and options by summer
Eurex is hoping to launch foreign exchange futures and options during the first half of 2014, according to a source familiar with the situation, as it continues to finalise its on-boarding process with its third-party settlement provider.
http://jlne.ws/1iq1ZX5

Montréal Exchange Derivatives Education Initiative Continues to Grow
Press Release (via The Wall Street Journal)
Montréal Exchange Inc. (MX), a wholly-owned subsidiary of TMX Group Limited and Canada’s derivatives exchange, today launched the fourth edition of the Options Trading Simulation contest.
The contest is open to undergraduate university students from coast to coast and engages students in the hands-on experience of trading Canadian options.
http://jlne.ws/1iq1H2q

CME Group Posts Weak Earnings on High Expense
Zacks
CME Group Inc.reported fourth-quarter 2013 operating earnings per share of 64 cents. Results missed the Zacks Consensus Estimate of 67 cents but beat the year-ago quarter figure by a penny.
http://jlne.ws/1ipVCTE

ISE Holdings Reports Business Activity for January 2014
Press Release (ISE)
– ISE and ISE Gemini™ combined represent 18.0% of equity options market share, excluding dividend trades.
– ISE and ISE Gemini reported a combined ADV of 3.0 million contracts.     
– ISE Gemini ADV increased by 25.8% from December 2013 to January 2014.
– Dividend trades made up 1.0% of industry volume in January 2014.
http://jlne.ws/1emUkJL

CBOE Holdings Reports January Volume
Press Release (CBOE)
CBOE Holdings, Inc. (NASDAQ: CBOE) reported today that January trading volume for options contracts on Chicago Board Options Exchange (CBOE) and C2 Options Exchange (C2SM) and futures contracts on CBOE Futures ExchangeSM (CFE) totaled 121.45 million contracts. Average daily volume (ADV) was 5.78 million contracts, a 36-percent increase from January 2013 and a 28-percent increase from December 2013.
http://jlne.ws/1emUmBr

VIX Futures Trading Volume Reaches All-Time High In January
Press Release (CBOE)
he CBOE Futures Exchange, LLC (CFE) today reported  that January 2014 was the most-active trading month for futures on the CBOE Volatility Index (VIX Index).  Total exchange-wide volume at CFE also reached a new all-time high during the month.
http://jlne.ws/1emUkte

CBOE VIX Options, C2 Options Exchange Establish New Single-Day Volume Records
Press Release (CBOE)
CBOE Holdings, Inc. (NASDAQ: CBOE) today reported two new single-day volume records:
– Options on the CBOE Volatility Index (VIX Index) established an all-time, single-day volume record of an estimated 2,367,764 contracts traded. Today’s record volume surpassed the previous record of 1,797,052 contracts traded on October 8, 2013.
– C2 Options Exchange (C2SM) set an estimated daily record of 662,195 contracts traded, surpassing the previous record of 623,314 contracts traded on April 19, 2013.
VIX Index futures recorded their second-best day ever, with estimated volume of 355,578 contracts. VIX futures’ most active day remains 449,955 contracts traded on April 15, 2013.
http://jlne.ws/1fEinCB

Options Exchange Marketshare – January 2014
OIC (via email)

January 2014 Total Options Marketshare:
AMEX-                 11.85%
BATS-                     3.28%
BOX-                       1.68%
CBOE-                   28.35%                                                            
C2-                          1.68%
GEM-                      2.95%
ISE-                        13.11%
MIAX-                     2.65%
NOBO-                    0.85%
NSDQ-                    9.42%
NYSE Arca-           9.71%
OMX PHLX-         14.47%

January 2013 Total Options Marketshare:
AMEX-                  14.73%
BATS-                      3.83%
BOX-                        2.54%
CBOE-                    22.39%
C2-                            1.45%
ISE-                          16.14%
MIAX-                      0.05%
NOBO-                     0.90%
NSDQ-                      6.24%
NYSE Arca-             12.02%
OMX PHLX-           19.69%

January 2014 Equity Options Marketshare:
AMEX-                  13.09%
BATS-                      3.63%    
BOX-                        1.86%
CBOE-                    20.81%
C2-                            1.85%
GEM-                        3.27%
ISE-                         14.50%
MIAX-                       2.94%
NOBO-                     0.94%
NSDQ-                     10.43%
NYSE Arca-           10.65%
OMX PHLX-          16.02%

January 2013 Equity Options Marketshare:
AMEX-                 16.22%
BATS-                      4.23%
BOX-                       2.80%
CBOE-                   14.92%
C2-                            1.58%
ISE-                        17.60%
MIAX-                     0.06%
NOBO-                    0.99%
NSDQ-                    6.88%
NYSE Arca-          13.20%
OMX PHLX-         21.52%

Regulation and Enforcement

CME Group seeks dismissal of charges over Nymex information leaks
Tom Polansek – Reuters
CME Group Inc has asked a U.S. judge to toss out charges brought by regulators alleging that the exchange operator is liable for two former employees accused of leaking details on clients’ trades.
http://jlne.ws/1brpVqT

Strategy

Profit From Volatility
Steven M. Sears – Barron’s
If you believe that the world is a global flowchart for capital, and that financial market volatility is an inevitable byproduct of the global economy, embrace CBOE Holdings (ticker: CBOE).
http://jlne.ws/1aZIQvi

VIX: How I Learned To Stop Worrying And Love The Fear
Robert Wagner – Seeking Alpha
In this article I detail a portfolio strategy based upon the VIX index. The “theory” portion discussion is based upon the actual VIX index. There are significant performance differences between the actual VIX Index and the ETFs that are based upon it. Significant adjustments must be made when implementing the “theory” to account for the reality that the VIX ETFs have significant tracking error.
http://jlne.ws/1ipYbVB

Volatility Trading Digest – Strategy Review
The Options Insider
S&P 500 Index (SPX) After a dramatic 38.17-point decline on January 24, the picture changed from what had been a slight “buy the dip” pullback to something more serious. From a classical bar chart perspective, a Hydra Head & Shoulders Top could be emerging with the potential neckline just below 1775.
http://jlne.ws/1brrntB

Options Strategy: Exploit the Correlation Crush
Steve Smith – Minyanville
In a recent piece, I discussed the use of a paired options trade strategy to capitalize on a decline in correlations in 2014.
Correlation refers to assets, sometimes in very different classes, moving up and down at the same time.
Today, I want to look at the concept of dispersion.
http://jlne.ws/1iq0DLJ

Events

CFA China | Shanghai CE Seminar
Options for Enhanced Yield and Risk-adjusted Returns in Times of Low Interest Rates
Speaker: Matthew Moran VP, Business Development, Chicago Board Options Exchange (CBOE)
Monday, 24 February 2014
As investors struggle to cope with volatility and low interest rates, there is increased interest in tools that can be used to achieve the goals of managing portfolio risk, increasing income, and enhancing long-term risk-adjusted returns.
http://jlne.ws/LvQmlb (PDF)

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