Observation and Insight
Stuart McClymont, managing director, JDX Consulting – Financial Services Infrastructure
“We’ve got lots of people and lots of different technologies, but we’ve got common problems; common issues that try to reduce the amount of duplication and operation processes for a common function.”
Stuart McClymont, managing director at JDX Consulting, explains the infrastructure for financial services. He gives a brief history of how the industry functioned without today’s technology, and then delves into how the technology boom in the 90’s created an influx of new opportunities for the markets and its participants. One key point was how companies needed to collaborate more together in order to use new technology efficiently. McClymont also touches on opportunities for the future and where the industry is headed from here.
The Week in VIX or Part 2 of the Big VIX Option Trade
Russell Rhoads – CBOE Options Hub
VIX drifted to close under 12.00 for the first time since late August as the S&P 500 made more new highs. The leftover fear from the market’s dive in October seems to be gone just like all our Thanksgiving leftovers. At least one derivative strategist thinks lower VIX levels are on the near term horizon. Buzz Gregory from Goldman Sachs was featured in Barron’s this weekend saying his models point to VIX around 10.60 before 2014 is done. The trades executed last week and discussed in a previous blog and at the end of this posting match up well with this forecast.
***DA: ‘Tis the season. As the year winds down and the books close, a benign market period becomes more benign, and volatility suffers.
China publishes draft rules on stock options, signals launch is near
Lu Jianxin and Engen Tham – Reuters
China’s main bourse and stock watchdog have separately published draft rules for trading of stock options and the public has up till early January to air their views, signalling a launch is drawing nearer after months of preparation.
Chinese regulators say they will launch a series of stock and commodity options in the coming year, and exchanges are already conducting simulated trading for some contracts.
***DA: One small step for China; one giant leap for global trading volume?
Goldman’s Gregory: The Oracle of VIX
Steven M. Sears – Barron’s
In ancient days, the Greeks sought guidance from the Oracle of Delphi. In the modern options market, investors wondering about Greeks—that is, the elements that measure put and call values—consult Goldman Sachs’ Krag “Buzz” Gregory.
Gregory, who has four math degrees, including two master’s degrees and a doctorate, is Wall Street’s wise man whom everyone consults to divine volatility’s future. Volatility is the essence of options prices. If you can accurately predict where volatility will trade before it reaches that level, you have a distinct advantage. Imagine how much money can be made if you know today that the CBOE Volatility Index will be 25% lower tomorrow.
***DA: True of any unknown event – stock prices, lottery numbers, and the price of tea in China. Forecasts are guesses, and good forecasts are good guesses, but not certainties by any stretch.
Traders bet Fed will start raising rates next July
Ann Saphir – Reuters
The Federal Reserve’s first round of interest-rate increases in a decade could start as soon as July, traders were betting on Friday, after a jump in jobs growth last month boosted confidence in the staying power of the U.S. recovery.
U.S. short-term interest-rate futures contracts plunged as traders priced in higher rates next year on the strength of a government report showing employers added 321,000 jobs last month, the most in nearly three years.
***DA: A slight shift in the probabilities, anyway. How many such head-fakes have we seen in Japan since 1991? I stopped counting in 2005.
Volatility Update: Market Claims Spot On “Nice” List … For Now
JJ Kinahan – Forbes
If the calendar is any guide, a seasonally quiet period for the U.S. equities market lies ahead. Beyond a smattering of economic data this week, there isn’t much on the docket that appears capable of roiling financial markets or spoiling the S&P 500’s (SPX) shot at record number 50 for 2014. Then again, as traders know, there’s always some risk of getting caught flat-footed should unexpected volatility bubble up.
Asset Managers are Turning to Index Derivatives to Mitigate Risk, Generating Record October 2014 Volumes, Says TABB Group
Press Release – via Digital Journal
Asset managers have told TABB Group that they are focusing more attention on index derivatives as market structure changes in both OTC and cash markets are impacting their portfolio decisions. As they change the way they manage cash flows and risk exposures, index derivatives are seeing greater growth as part of the evolution of existing strategies, already generating record level volumes on multiple days in October 2014.
CME Group Sees Unusually High Options Volume (CME)
Justin Garson – Sleek Money
CME Group (NYSE:CME) was the recipient of unusually large options trading on Friday. Investors bought 35,002 call options on the company, American Banking & Market News reports. This represents an increase of approximately 1,422% compared to the typical volume of 2,299 call options.
***DA: The company’s Q4 earnings release is scheduled for Feb. 3.
Wall Street’s fear gauge dips on upbeat jobs report
Saqib Iqbal Ahmed – Reuters
Wall Street’s fear gauge, the CBOE Volatility Index .VIX, dipped sharply on Friday after a surprisingly strong jobs report, and there was a surge in put activity in the index’s options.
The VIX fell as much as 7 percent to 11.53, its lowest since Sept. 19, after data released Friday showed U.S. employers had added the largest number of workers in nearly three years in November. In late trading, it was down 3 percent at 12.01.
Consulting the Options Oracle
Adam Warner – Schaeffer’s Investment Research
I nominated myself “VIX Czar” recently. But, ever since we cured Ebola (or, at least, stopped covering it), no one has any interest in czars anymore.
I should have called myself an oracle. I missed my chance, it’s too late now, and my friend, Steven Sears, has found someone more “oracular” (or something).
***DA: How about VIX Gadfly?
Traders building bearish bets on Nifty as volatility expectations near all-time low
Nishanth Vasudevan – Economic Times
Is the market poised for a correction? Some seasoned options traders, who watch sentiment indicators in equity derivatives closely, are building bearish bets on the Nifty as volatility expectations are near all-time lows. When implied volatility — a measure of traders’ expectations of near-term risks based on options value — drops, it means very few traders are anticipating a drop in the market. But when implied volatility drops to lows, the experienced on Dalal Street see it as a sign of a possible reversal in sentiment.
Regulation and Enforcement
Futures Trader Charged by U.S. With Stealing Firm Secrets
Andrew Harris – Bloomberg
Futures trader David Newman was indicted by a U.S. grand jury for allegedly stealing hundreds of thousands of computer files from his former firm, only to quit days after getting his annual bonus.
Newman, 32, worked at WH Trading LLC, his lawyer, Thomas Leinenweber, said in a telephone interview. According to an indictment returned yesterday in Chicago, Newman secretly downloaded from the firm more than 400,000 files containing computer source code and programs. The indictment doesn’t name the firm.
Finextra: Fenics provides FX options system to MoneyCorp
Press Release – via Finextra
FENICS, a leading provider of FX options software, announced today that TTT MoneyCorp Ltd “MoneyCorp”, the UK’s leading independent foreign currency exchange broker, has licensed FENICS ProfessionalTM, a FX derivatives pricing and risk management system, to support the expanding range of foreign exchange products and services offered to its clients.
It’s An Option Buyer’s Market
Jeff Pierce – Investing.com
Ask anyone who has ever bought stock options, and you’ll likely hear at least one tale of regret. That’s because it’s possible to suffer a loss on stock options, not just when picking the wrong stock, but even when one is correct about the direction of the stock price.
It’s bad enough for a trader to pick the wrong stock and lose, but to pick the right stock and lose can be downright maddening. Without a thorough understanding of the behavior of stock options, it’s not just possible to lose money buying options on the right stock at the right time, it is actually very common.
***DA: You have to be right about two things – direction and time.
Levine on Wall Street: Watch Out for the Gamma Trap
Matt Levine – Bloomberg
Something weird in Treasuries, anyway: “By 9:38 a.m., 10-year Treasury yields plunged 0.34 percentage point, the most in five years.” But why? This Risk Magazine article (or try this link) offers what strikes me as a pretty compelling, though messy, explanation.
***DA: Think of it as a volatility short squeeze. Selling premium feels like free money, until it isn’t.
The Time To Hedge Is Now! December Update – Part I
Mark Bern – Seeking Alpha
I want to make it very clear that I am not predicting a market crash. Bear markets are a part of investing in equities, plain and simple. I like to take some of the pain out of the downside to make it easier to stick to my investing plan: select superior companies that have sustainable advantages, consistently rising dividends and excellent long-term growth prospects. Then I like to hold onto to those investments unless the fundamental reasons for which I bought them in the first place changes. Investing long term works! I just want to reduce the occasional pain inflicted by bear markets.