JLN Options: The Trouble With Wall Street Clichés; Is The Market Operating On Borrowed Time?; Option trader rides the Japanese bull

Jun 2, 2014

Lead Stories

The Trouble With Wall Street Clichés
Steve Sosnick – Barron’s
These may not be the times that try men’s souls, but they are certainly trying options traders’ patience.
As the S&P 500 and Dow Jones Industrial Average flirt with all-time highs, we are suffering through weeks of subpar-trading volume in both options and their underlying stocks. According to the Options Clearing Corp., the average daily options volume was roughly 15.3 million contracts in May, about 12% below the overall average thus far this year.

Is The Market Operating On Borrowed Time?
JJ Kinahan – Forbes
As the calendar flips to June, no data point looms larger than Friday’s payrolls report. It’s a thin calendar for economic reports and earnings this week anyway, and that means the jobs data will be subject to more scrutiny than usual. Investors will lean on the marquee report for proof that recent strength in both stocks and bonds has been justified. Or, is it possible that this report will bring the volatility needed to shake up the broad indexes one way or the other?

Option trader rides the Japanese bull
Andrew Wilkinson – Interactive Brokers
A huge calendar roll appears to have traded involving around 500,000 call options indicating that the investor remains bullish on the prospects for Japanese stocks. The iShares MSCI Japan ETF (Ticker: EWJ) reached a five-month high at $11.74 as the global bull market for stocks remained on track. A sizable options position using the EWJ starting out on April 8, appears to have been rolled forward from June to July in the expectation that the bullish move will continue.

Fund Managers’ Net Bullish Gold Position Smallest Since Late January – CFTC Data
Kitco News (via Forbes)
A sharp price drop prompted large speculators to cut their net-long positions in gold futures and options on the Comex division of the New York Mercantile Exchange to the smallest levels since late January.

How ISM’s Mistake Impacted the Stock Market
Steven Russolillo – The Wall Street Journal
Stocks are back in the green after a reading on U.S. manufacturing activity was corrected to show faster-than-expected growth in the sector.
The Institute for Supply Management revised its May manufacturing reading to 55.4 from an originally reported 53.2. The corrected figure exceeded economists’ expectations and provides a much different picture of the manufacturing sector than the original, incorrect data point portrayed.

ISM and the parade of wrong numbers – Capitol Report
Steve Goldstein – MarketWatch
What the heck happened with the Institute for Supply Management manufacturing data released Monday?
Simply put, it’s due to the fine art of seasonal adjustment. Or the not-so-fine art.

Twitter Takes Flight in Options Market Amid Rebound Bets
Joseph Ciolli and Callie Bost – Bloomberg
The selloff that wiped $17 billion from Twitter Inc. (TWTR)’s market value this year is giving way to a frenzy of demand for options that pay should the shares rebound.
After the stock erased more than 85 percent of last year’s rally in the first five months of 2014, trading in bullish contracts has surged to the highest level relative to bearish ones since February, data compiled by Bloomberg show.

Videocast: Selling premium in VIX

Political Chaos: Wall Street’s New Volatility?
Adam Samson – FOX Business
Volatility on Wall Street might be low, but Main Streets around the world are more restive than they have been in years. And that could mean tumult ahead for financial markets and economies.
“Judging by the mood in global markets, the financial crisis is over,” a team led by Citigroup chief global political analyst Tina Fordham wrote in a research paper. “Yet it seems like political risk features in the news every day: another street protest; a new government collapse; a rally calling for independence; the outbreak of civil conflict.”

Dangerous Cocktail: Lack Of Volatility, Volume And Bears
Tiho Brkan – Investing.com
I will be updating sentiment conditions properly and in-depth, as I usually do during the first weekend of every month. However, I thought it was prudent to open up a discussion as early as today on a phenomenon the majority of you readers have most likely already noticed. Let’s call this condition a lethal and dangerous cocktail mix of rock bottom complacent volatility, extremely low volume readings and the lack (or even better—non-existence) of bearish investors.

The VIX: Priced What It’s Worth?
Why the current VIX price is probably right where it should be
Adam Warner – Schaeffer’s Investment Research
Everyone’s always saying that the CBOE Volatility Index (VIX) is “too high” or “too low” … it never seems to be “right.” And really, it’s rarely considered “too high.”
The consensus always says it’s too low, and that it’s a sign of too much complacency and a harbinger of big declines ahead. Setting aside that a low VIX isn’t really the best market signal, my question is, what is the “right” level?

Can This Be Good? China Looks To Build Out Risky Derivatives Market
Kenneth Rapoza – Forbes
The asset backed securities that sunk the U.S. economy, namely the complicated financial products known as mortgage backed securities, is a market China wants to consider opening up to…Americans.

What Are the Potential Implications of the End of the Silver Fix in London?
Fabrice Drouin Ristori – ValueWalk
The London silver fix will end in August, 2014. This fix is used as a benchmark, or proxy, for the physical silver market, but it mainly serves as a contractual basis for the determination of the value of silver derivatives and swaps, as defined in the official ISDA (International Swaps and Derivatives Association) document.

Risks Grow Beneath the Surface of the Market
Alan Gula – Trefis
The question of the moment seems to be whether or not investors are feeling a bit too secure.
Is the market outwardly unconcerned – or largely unaware of actual dangers lurking beneath the surface?
Well, to begin answering that question, we can turn to the Chicago Board Options Exchange Volatility Index (VIX), which is somewhat mischaracterized as the market’s “fear gauge.”
A complacent market is often associated with a low VIX reading.
And, sure enough, the VIX recently dropped to the lowest level since March 2013.


Euronext prepares to relist for ‘a new era’
Philip Stafford – Financial Times
Euronext, the exchanges operator, is set to relist in coming weeks, still driven by its desire to have a central role in the European capital markets.
The group was created 15 years ago by the merger of four stock exchanges to take advantage of the launch of the euro and the single market. That vision was waylaid by the financial crisis and a 2007 merger with the New York Stock Exchange that failed to live up to its billing to create a transatlantic stock listings venue.

Nasdaq OMX: The exchange that is out to grow it alone
Anna Irrera – Financial Times
Nasdaq OMX, which descends from Nasdaq, the world’s first electronic exchange back in 1971, takes its own approach to creating the businesses and technologies that it hopes will power its future. The Nasdaq way is to incubate new ventures within the group.
Last week, just after news that one of its competitors, derivatives giant CME Group, had started a venture fund to invest in external start-ups, a product of Nasdaq’s internal incubator celebrated its first birthday. The birthday child was Nasdaq OMX NLX, the London-based derivatives exchange.

CBOE Holdings Reports May 2014 Trading Volume
Press Release (CBOE)
CBOE Holdings, Inc. (NASDAQ: CBOE) reported today that May 2014 trading volume for options contracts on Chicago Board Options Exchange (CBOE) and C2 Options ExchangeSM (C2) and futures contracts on CBOE Futures ExchangeSM (CFE) totaled 97.08 million contracts. Average daily volume (ADV) was 4.62 million contracts, a one-percent decrease from May 2013 and a nine-percent decrease from April 2014.

CBOE Futures Exchange Reports May 2014 Trading Volume
Press Release (CBOE)
The CBOE Futures Exchange, LLC (CFE) today reported that May 2014 average daily volume (ADV) and total monthly volume in futures on the CBOE Volatility Index (VIX Index) and total exchange-wide at CFE decreased from year ago levels. 
Average daily volume in VIX futures was 143,946 contracts during May, a one-percent decrease from May 2013 and a 19-percent decrease from April 2014.  May total trading volume in VIX futures was 3.02 million contracts, a six-percent decrease from May 2013 and a 19-percent decrease from April 2014. Year-to-date, VIX futures total volume of 19.14 million contracts is 16 percent ahead of the prior year period and ADV of 185,837 contracts per day is 17 percent ahead of the prior year period.

ISE Holdings Reports Business Activity for May 2014
Press Release (ISE)
– ISE and ISE Gemini combined represent 16.1% of equity options market share, excluding dividend trades.
– ISE and ISE Gemini reported a combined ADV of 2.1 million contracts.     
– Dividend trades made up 1.9% of industry volume in May 2014.

BATS 1000 Index Closes at All-Time High
Press Release (BATS)
May 30, 2014 – BATS Global Markets, a leading operator of securities markets in the U.S. and Europe, reports the BATS 1000 Index (Ticker: BATSK) closed at a new record high of 21,661.65 today, rising 255.08 points, or 1.2%, on the week. All ten sectors that comprise the Index advanced on the week with the Utilities sector, up 1.8%, leading the gains.
http://jlne.ws/1n5IOV5 (PDF)

BOX Price Improvement Activity for May
Press Release (BOX)
In the month of May, price improved contracts on BOX Options Exchange (“BOX”) averaged 268,548 per day, which represented a 9% increase over the same period last year. Price improvement versus the prevailing NBBO for contracts submitted via BOX’s price improvement auction, PIP, averaged $429,141 per day, while total savings to investors this month was $9.0MM. With this, BOX has saved investors over $506 MM since its inception in 2004. Overall average daily trading volume on BOX in the month of May was 398,937 contracts.

OCC Announces Cleared Contract Volume Declined In May While 2014 Volume Remains Up
Press Release (OCC)
OCC announced today that total cleared contract volume reached 319,742,239 in May, an 18 percent decrease from the May 2013 volume of 391,347,069 contracts. OCC’s year-to-date cleared contract volume remains up for 2014 with 1,789,079,351 contracts, 1 percent higher than the same point in 2013. OCC’s year-to-date average daily contract volume is up 2 percent at 17,369,702 contracts.
Options: Exchange-listed options trading volume reached 315,630,235 contracts in May, an 18 percent decrease from May 2013. Average daily options trading volume in 2014 is 17,104,202 contracts, 2 percent higher than the same time last year. Year-to-date total options volume is up 1 percent with 1,761,732,803 contracts traded in 2014.

The Options Industry Council Announces Options Volume Falls in May
Press Release (OIC)
The Options Industry Council (OIC) announced today that 315,630,235 total options contracts traded in May, which is 18.32 percent less than last May when 386,428,255 contracts were traded. Overall 2014 volume remains up by 0.60 percent with 1,761,732,803 contracts compared to last year’s 1,751,155,921 contracts.
Average daily volume for the month was down 14.43 percent with 15,030,011 contracts exchanged compared to last May’s 17,564,921 contracts. For the year so far, average daily came in at 17,104,202 contracts, 1.58 percent more than the same period last year when 16,838,038 contracts were traded.

Regulation and Enforcement

CFTC Should Reconsider Gensler Advisory, Wetjen Says
Silla Brush – Bloomberg
The main U.S. derivatives regulator should consider revising a policy that helped prompt a lawsuit by Wall Street lobbying groups because it extended the reach of rules to deals arranged in the country but held overseas, the agency’s acting chairman said.

Investor, Bettor, Golfer: Insider Trading Inquiry Includes Mickelson, Icahn and William T. Walters
Matthew Goldstein and Ben Protess – The New York Times
The divergent lives of a championship golfer, a high-rolling gambler and a billionaire investor have collided in a federal insider trading investigation.
Federal authorities are examining a series of well-timed trades made by the golfer Phil Mickelson and the gambler William T. Walters, people briefed on the investigation said, focusing on trading in two different stocks. The authorities are also questioning what role, if any, the investor Carl C. Icahn may have had in sharing information about one of the stocks: the consumer products company Clorox.


Calendar Axiom Broken, But Valuations Are A Concern – Market Outlook
Price Headley – CBOE Options Hub
So much for the “Sell in May” axiom.  The market just logged its second bullish week in a row at a time of year that’s not supposed to be bullish at all.  For May, the S&P 500 (SPX) (SPY) gained an impressive and surprising 1.8%.  
Is this a sign that stocks are just so hot and so underestimated that there’s just no stopping them?  Or, were the past couple of weeks just a little lucky volatility we’ll end up paying the price for in June in the form of a pullback?

Covered Call Trading – Urgent Warning
Chris Ebert – Benzinga
The S&P 500 and other stock market indices are making new record highs. Rallies in recent months – years, actually – have been strong and long lasting, with pullbacks brief and barely significant enough to reach the broadest definition of a market correction. In short, the stock market life is good. But the life of the Covered Call trader is actually not so good.

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