JLN Options: The VIX is at a critical level; U.S. Stocks Drops as S&P 500 Slides Below 200-Day Average; Scholes On The Intuition Behind Black-Scholes

Oct 13, 2014

Observations and Insight

SEFCON V: One Year In – November 12, 2014, Grand Hyatt New York
JohnLothianNews.com
The Wholesale Markets Brokers’ Association, Americas (WMBAA) will host its fifth annual SEFCON event on November 12. Register Here

Watch the video promo and register to join dealers, traders, exchanges and regulators for this once-a-year look at the state of the SEF world.

Now that SEFs have been operational for a year, it is time to take a fresh look.

Watch the video »

Lead Stories

The VIX is at a critical level
Amanda Diaz – Yahoo Finance
Last week’s whipsaw action in stocks sent the smell of fear across the markets.
The CBOE Volatility Index, commonly referred to as the VIX or “fear index,” surged to its highest level since late 2012 on Monday as stocks continued to slide. The index, which trades inversely to the S&P 500, is a common indicator of nervousness in the market.
So, can we expect even more volatility to come? And what will it mean for stocks?
http://jlne.ws/ZovJye
***SR: Well, we know what it means for futures on the VIX (see below under “Exchanges”).

U.S. Stocks Drops as S&P 500 Slides Below 200-Day Average
Joseph Ciolli and Oliver Renick – Bloomberg
U.S. stocks slumped, with the Standard & Poor’s 500 Index falling below its 200-day average, as investors weighed prospects for Federal Reserve interest rate increases and slowing global economic growth.
Merck & Co. (MCK), Johnson & Johnson and Halliburton Co. paced losses in health-care and energy stocks that led the market lower earlier. CSX Corp. jumped 7.8 percent after the railroad operator spurned a merger proposal by Canadian Pacific Railway Ltd., according to people familiar with the matter. Norfolk Southern Corp. and Kansas City Southern also climbed..
http://jlne.ws/1sapIPZ

Scholes On The Intuition Behind Black-Scholes
Michael Ide – ValueWalk
The Black-Scholes model for options pricing is the starting point understanding how to value derivatives, but the mathematics involved can be intimidating and at this point sophisticated options traders are working with more sophisticated models (and Monte Carlo simulations) anyways. But for anyone interested in the thought process behind the heavy math, Nobel Laureate Myron Scholes explains how to interpret the equation that bears his name in an interview with the CFA Institute’s Larry Cao.
http://jlne.ws/1v4CqSL

Volatility Update: Pressure on Earnings to Deliver
JJ Kinahan – Forbes
The floodgate on Q3 earnings reports swings open on Tuesday and remains agape through October. This round of earnings raises a big question: Can Corporate America deliver results strong enough to stabilize volatile markets?
http://jlne.ws/1v4DJRK

Here’s why this drop is not like the others: Trader
Alex Rosenberg – CNBC
Over the past few years, dips in the market and spikes in the S&P volatility index have been serious buying opportunities. But as the S&P 500 touches a five-month low and the VIX hits the highest level since 2012, one option expert is warning that this VIX spike might not be like all of the others.
http://jlne.ws/1v4EBWs

Can The 200 Day Moving Average Halt The Downtrend? – Weekly Market Outlook
Price Headley – CBOE Options Hub
Not only was last week the worst week we’ve seen for stocks all year, it was the worst week we’ve seen since May of 2012.  All told, the S&P 500 (SPX) (SPY) plunged 61.77 points last week… a 3.1% decline.  We’re now 5.6% under the S&P 500’s peak of 2019.26, hit four weeks ago.  The decline on Friday also saw the BigTrends TrendScore give a week-ending bearish reading on stocks for the first time in some time.
http://jlne.ws/1v4Fz56

Deutsche pullback shows CDS challenges
Christopher Whittall – Reuters
Deutsche Bank has significantly scaled back single-name credit default swap trading in Europe as it struggles to meet regulatory hurdles on leverage. It is a move that is symptomatic of a wider malaise in a market wallowing in low volumes and spiralling costs.
http://jlne.ws/1v4DciI

Morningstar Changes Analyst Rating for 10 PIMCO Funds, Three Other U.S. Funds
Press Release – (via CNN Money)
Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced Morningstar Analyst Rating™ changes for several U.S. funds. The Morningstar Analyst Rating for funds represents Morningstar’s conviction in the fund’s ability to outperform on a risk-adjusted basis over the long term. The five-tiered, qualitative Morningstar Analyst Rating scale has three positive levels, indicating Morningstar Medalists—Gold, Silver, and Bronze—in addition to Neutral and Negative ratings.
http://jlne.ws/1v4A5r9

More 2017 LEAPS Listed Today
Marty Kearney – CBOE Options Hub
As of this morning, we are now 2/3 of the way through listing ETF and stock (equity)  LEAPS options expiring in January of 2017.  Monday September 15th we added 2017 Leaps for stocks on the “January Cycle”.  This morning we added LEAPS on those stocks and ETF’s in the “February Cycle”,  and in five weeks we will finish adding LEAPS for stocks and ETF’s on Monday November 17th for those stocks in the March Cycle”.
http://jlne.ws/1v4FcaD

India VIX Climbs as Foreigners Boost Nifty Option Purchases
Santanu Chakraborty – Bloomberg
An Indian gauge of protection against stock-market swings rose to the highest level in nine weeks after foreigners made the biggest net purchases of CNX Nifty Index options in nearly two months.
The India VIX Index increased 1.2 percent to 14.5, the highest close since Aug. 8. Overseas investors bought a net $362 million of Nifty options on Oct. 10, the most since Aug. 19, data compiled by Bloomberg show. Foreigners also sold a net $239 million from Nifty futures contracts on Oct. 10. That’s the biggest sale since Aug. 8 and the second-biggest since Sept. 3 last year.
http://jlne.ws/1v4t1e1

Cross-border deal drives HSBC’s Hong Kong business
Xiao Wang – Risk.net
Driven by the continuous development of renminbi derivatives business, as well as a number of other business lines including corporate finance and prime brokerage, HSBC is able to maintain its market-leading position in Hong Kong as a comprehensive financial products and services provider in 2014.
http://jlne.ws/1wuMTFe

Exchanges

CBOE Futures Exchange Reports Busiest Week In History
Press Release – CBOE
The CBOE Futures Exchange, LLC (CFE) today announced that trading volume during the week of October 6 through 10 — both exchange-wide at CFE and for futures on the CBOE Volatility Index (VIX Index) — set new records for a one-week period.Total exchange-wide volume at CFE from October 6 through 10 totaled 1,664,651 contracts, topping the previous record of 1,506,331 contracts traded during the week of August 4 through 8.  For VIX futures, volume last week totaled 1,661,153 contracts, surpassing the previous record of 1,504,866 contracts traded during the week of August 4 through 8.
http://jlne.ws/1v4tYmw

MIAX Options Hits One Million Contracts Traded and Receives 2014 Northeast Project Award
Press Release – MIAX
MIAX Options Exchange (MIAX) announced today that it executed in excess of 1,000,000 contracts in a single day for the first time today, representing a new single-day record for the exchange.  In total, MIAX executed 1,049,727 contracts, which represented a 4.38% market share of overall equity options volume.
http://jlne.ws/1a7v713 (Note:  The PDFs at that link currently are not working…hopefully they will fix that soon.)

OCC Announces Laurie Flom as New Head of Enterprise Risk Management
Press Release – OCC
OCC announced today that Laurie Flom has joined OCC as First Vice President and Head of Enterprise Risk Management.
Ms. Flom comes to OCC from Associated Banc-Corp where she served as Senior Vice President, Director, Enterprise Risk Management. In that role, she was responsible for developing and implementing the bank’s enterprise risk management framework. Prior to that, she held similar positions as Senior Vice President, Enterprise Risk Management at Northern Trust Company and Senior Vice President, Head of Services Risk Management at LaSalle Bank Corporation. Ms. Flom has additional experience operating as a commercial banker before specializing in risk management.
http://jlne.ws/1v4xOw3

Regulation and Enforcement

Banks accept derivatives rule change to end ‘too big to fail’ scenario
Huw Jones – Reuters
The $700 trillion financial derivatives industry has agreed to a fundamental rule change from January to help regulators to wind down failed banks without destabilising markets.
The International Swaps and Derivatives Association (ISDA) and 18 major banks that dominate the market will now allow financial watchdogs to apply temporary stays to prevent a rush to close derivatives contracts if a bank runs into trouble, the ISDA said on Saturday.
http://jlne.ws/1v4tf4X

Strategy

Make the Stock Slide Work for You by Using Options
Steven M. Sears – Barron’s
This past week’s equity declines, amid fear of deflation, and the end of the Fed’s easy-money policies, makes clear the need for time arbitrage.
If you weren’t hedged against the return of volatility, focus on what you can gain from the sharp decline, rather than panicking. Many equity indexes have fallen near or below their 200-day moving averages, a bearish sign to many technical analysts. But this also means that many good stocks that can be core portfolio holdings are now trading at more attractive prices, including ExxonMobil (ticker: XOM), Bank of America (BAC), Goldman Sachs (GS), and many health-care issues. That’s good news for long-term investors.
http://jlne.ws/1xLmbte

Overbought VIX: Time to Buy and Hold SPY?
Adam Warner – Schaeffer’s Investment Research
Well, it took a lot of work, but we finally got there. By there I mean that the CBOE Volatility Index (VIX) finally closed 20% above its 10-day simple moving average, the criteria I use to officially declare VIX overbought. We hit it intraday at other times, but haven’t closed there since late July.
http://jlne.ws/1v4EXwn

Ebola Stocks: A Real Portfolio Killer
Matthew Finston – Seeking Alpha
With the threat of a worldwide Ebola epidemic, we are witnessing a momentum outbreak, so to speak, for Ebola stocks. We have seen this movie before. And with the “legitimate” Ebola tickers, like Tekmira Pharmaceuticals Corp (TKMR), Lakeland Industries, Inc. (LAKE), Alpha Pro Tech, Ltd (APT), Chimerix Inc (CMRX), iBio, Inc (IBIO), all seeing massive gains, there is once again room for fraud and deceptive marketing.
http://jlne.ws/1v4Ds1j

Higher Market Volatility Could Be A Buying Opportunity
Seeking Alpha
Volatility is back. The market is beginning to falter under the barrage of geopolitical turmoil, depressed commodity prices, muted earnings, and now a drop in consumer confidence.
http://jlne.ws/1v4E1YP

Options Education

Book Review: The Complete Guide To Option Selling
Brenda Jubin – Investing.com
In this, the third edition of The Complete Guide to Option Selling: How Selling Options Can Lead to Stellar Returns in Bull and Bear Markets (McGraw-Hill, 2015), James Cordier and Michael Gross explain how to use options to make money in the commodities futures markets. Most of their recommended strategies involve naked positions; only one, the vertical credit spread, is a defined risk trade.
http://jlne.ws/1v4znKq

 

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