JLN Options: Trader Spends $13 Million to Bet VIX Will Jump 56% by September; Shorts Pull Out of VIX Note in Bet Calm Is About to End; Where Did All the Volatility Sellers Go? VXX Edition

May 21, 2014

Lead Stories

Trader Spends $13 Million to Bet VIX Will Jump 56% by September
Callie Bost – Bloomberg
A trader paid almost $13 million to buy call options that pay off if the Chicago Board Options Exchange Volatility Index rises at least 56 percent in the next four months.
The person used a strategy known as a call spread, designed for bets that a security will trade within a certain range. About 150,000 bullish contracts on the VIX expiring in September with a strike price of 19 were bought, according to an e-mailed note from Lake Hill Capital Management LLC, a hedge fund that provides analysis on equity derivatives. The cost was offset by selling the same amount of Sept. 28 calls.

Shorts Pull Out of VIX Note in Bet Calm Is About to End
Callie Bost – Bloomberg
The calm that has prevailed in equity markets for most of the last eight months is in danger of lifting, according to speculators in an exchange-traded note tied to equity swings.
Short sellers have withdrawn from the iPath S&P 500 VIX Short-Term Futures ETN on concern the security will rise along with market turbulence. Bets (VXX) against the ETN, which tracks the Chicago Board Options Exchange Volatility Index, have fallen to 25 percent of shares outstanding from a record 126 percent in February, data compiled by Markit Securities Ltd. and Bloomberg show.

Where Did All the Volatility Sellers Go? VXX Edition
Brendan Conway – Barron’s
A month ago this blog noted how a risky way to capitalize on other investors’ fears isn’t working so well this year, and the hedge funds specializing in the trade had pulled back.
Well, here’s another twist on the same story, this time involving a heavily traded exchange-traded note whose fortunes are tied, albeit in a complex manner, to the fate of the stock market.

Was VXX Invited To The Party?
Mark Sebastian – CBOE Options Hub
One too many mediocre earnings reports sent stocks swooning, coupled with a “tough love” shout by one of the Fed bigwigs.  The simple reason is that stocks have run and the reasons to keep buying them are less compelling.  The big slowdown from the winter deep freeze keeps showing up in company earnings as many folks in the Midwest eastward stayed home and burned fossil fuel.

Vix: Falling, but still lofty?
Andrew Wilkinson – Futures
In an earlier note we spoke about a September call spread in which an investor appeared to be taking in premium (Sep 19/28 call spread @85-cents).
We noted that, of course, the strategy was far from risk free even though losses were capped, but still, onlookers note that complacency seems to be breeding further complacency. With stocks close to record highs, and the geopolitical tension surrounding Ukraine struggling to find a place in the lexicon of economic disruption for now, investors continue to drive down volatility.

Videocast: Huge VIX spread sold

What Lurks Beneath? Market Calm Unnerves Global Central Bankers
Simon Kennedy – BloombergBusinessweek
Global central bankers sounded the alert about the calmness in financial markets, saying it risked creating future instability and complicating monetary policy.
Twenty-four hours of warnings were led by Federal Reserve Bank of New York President William Dudley’s acknowledgment that the slide in market volatility “makes me a little nervous.” Bank of England Deputy Governor Charlie Bean said conditions were “eerily reminiscent” of the pre-crisis era, while Bundesbank board member Andreas Dombret said “we do see risks despite the fact that the markets are calm.”

Dark Pools Opening Up Amid Increased Scrutiny
Sam Mamudi – Bloomberg
Dark pools, the private trading venues that together host more U.S. equity volume than the New York Stock Exchange, are opening up.
New rules on Wall Street this month are forcing dark pool operators to report trading details to regulators. KCG Holdings (KCG) Inc., Liquidnet Holdings Inc. and IEX Group Inc. plan to share the information with the public. KCG and Liquidnet will also join IEX and Investment Technology Group Inc. (ITG) in posting dark pool rule filings, known as Form ATS, on their websites.


OCC and The U.S. Options Exchanges Adopt New Pre- and Post-trade Risk Control Principles
Press Release (via Yahoo Finance)
OCC and the U.S. options exchanges announced today the adoption of pre- and post-trade risk control principles that are designed to enhance the monitoring of trading activity on a real-time basis and reduce the risk of errors or other inappropriate activity that poses a material risk of significant market disruption. The new principles, which are consistent with ongoing initiatives by the U.S. options exchanges to enhance exchange risk controls, will supplement enhanced OCC post-trade controls that are currently under development.
***JB: Our very own Jim Kharouf wrote about this a couple weeks ago.  Check it out here: We Like Big Brother! Why Options Exchanges Want OCC’s Eyes

Nadex Appoints Donald Horwitz as Chief Regulatory Officer
Adil Siddiqui – Forex Magnates
The world’s first listed binary options exchange, the North American Derivatives Exchange (Nadex), has extended its top management. The firm officially announced that Donald L. Horwitz has joined the firm as General Counsel and Chief Regulatory Officer. Mr. Horowitz will report directly to Timothy McDermott who will assume full responsibility as Nadex’s CEO.

Liffe to Launch FTSE 100 Equally Weighted Index Futures; ‘Smart Beta’ Indices Available via Bclear
Press Release – IntercontinentalExchange Group (via The Wall Street Journal)
IntercontinentalExchange Group (NYSE: ICE), the leading global network of exchanges and clearing houses, today announced that Liffe will introduce futures based on the FTSE 100 Equally Weighted Net Total Return (NTR) Index.
Following regulatory approval, Liffe will launch the industry’s first futures contract on the FTSE 100 Equally Weighted Index on May 27, 2014 via Bclear, the exchange’s wholesale facility. The new contract will complement Liffe’s existing franchise of FTSE index derivatives, which offers the most extensive and liquid range of FTSE index futures and options contracts.

CME Group faces battle in bid to shrink board
Tom Polansek – Reuters
CME Group Inc, the world’s largest futures market operator, aims to win shareholder approval on Wednesday to halve the number of board members who represent Chicago Mercantile Exchange users.
Trimming three of the six board members who represent market users would help the company, which owns the Chicago Mercantile Exchange and four other markets, reduce what is the largest board among companies that make up the Standard & Poor’s 500 Index. The board is set to drop to 24 directors from 29 this year, still topping the next-largest board at BlackRock Inc by five members, according to Institutional Shareholder Services.

Regulation and Enforcement

DERIVATIVES: Work needed to spot next crisis
Christopher Whittall – IFRE
Regulators and the derivatives industry need to redouble efforts on aggregating and analysing swaps data in order to spot future systemic build-ups of risk in derivatives markets, an audience at the Centre for Economic Policy Studies heard in Brussels.


Inverse VIX ETF Bets Pay Off on Wanning Market Volatility
Max Chen – ETF Trends
As volatility wanes, investors have been betting against the CBOE Volatility Index with inverse exchange traded products. However, some are beginning to hedge against a complacent market, issuing a warning on potential short-term risks.
Betting against spikes in market volatility has been a winning idea so far this year. For instance, the VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV), ProShares Short VIX Short-Term Futures ETF (NYSEArca: SVXY) and VelocityShares Daily Inverse VIX Medium Term ETN (NYSEArca: ZIV) were among six ETFs that touched all-time highs Wednesday. Year-to-date, XIV is up 6.4%, SVXY is up 6.5% and ZIV is up 9.9%.

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