JLN Options: Traders Bemoaning Losses Detect Volatility Reprieve; Bond Insurers Surviving Puerto Rico Default Lures Bulls: Options; Former Goldman Options Trader Becomes Argentina Taxi King

Jul 28, 2014

Lead Stories

Traders Bemoaning Losses Detect Volatility Reprieve
Neal Armstrong – Bloomberg
Currency traders are detecting the first signs of what they’ve been waiting for all year: a revival in volatility that may help trim their losses.
Tensions in Ukraine and Gaza, together with interest-rate increases from New Zealand to South Africa (SARPRT), are helping push up a measure of price swings by the most since January. Volatility had flattened in recent months as policy makers continued to provide unprecedented amounts of cheap cash to spur growth.

Bond Insurers Surviving Puerto Rico Default Lures Bulls: Options
Oliver Renick – Bloomberg
Bad news for Puerto Rico may be good news for Assured Guaranty Ltd. (AGO), as options traders bet the bond insurer will withstand a possible default by the island’s main electricity provider.
Assured, which backs $852 million of debt issued by the Puerto Rico Electric Power Authority, has seen its shares decline 13 percent since June 19. Trading in the options market is signaling a rebound, with calls trading near the most expensive level to puts in 20 months. The contract with the highest ownership is betting on a 29 percent rally by January, data compiled by Bloomberg show.

Former Goldman Options Trader Becomes Argentina Taxi King
Camila Russo – Bloomberg
After 23 years trading stock options at Goldman Sachs Group Inc., Merrill Lynch & Co. and his own hedge fund, Russell Abrams is piling into his most exotic gamble yet: as a Buenos Aires taxi impresario.
Abrams, 48, plans to invest as much as $100 million of his own money to build a fleet of Buenos Aires cabs, undaunted by the prospects for Argentina’s second default in 13 years, the fallout from the peso’s devaluation in January, inflation of about 40 percent and the economy’s first quarterly contraction since 2012.

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The Impact of High-Frequency Trading on Volatility

Adam Warner – Schaeffer’s Investment Research
As we’ve noted often recently, small-cap volatility has hit record levels versus big-cap volatility this year. “Record” requires a little perspective, as we can only go back to 2007 on Russell 2000 Index (RUT) volatility, but still, it’s very noteworthy.
Perhaps we can blame (or thank) high-frequency trading (HFT).

Busy Week On Tap – Weekly Market Outlook 7.28
Price Headley – CBOE Options Hub
Although the market’s uptrend may still technically be intact, there’s no denying it’s in question now.  The very day after the S&P 500 (SPX) (SPY) pushed its way past a key resistance line, it also fell back under it … in spades.  That pullback didn’t crush the uptrend, but we’re close to falling off the edge of the proverbial cliff.  We’ll look at the make-or-break lines in a moment.  The first thing we want to get out of the way is a look at last week’s and this week’s economics-based clues.

Videocast: Betting on lower volatility

Global Currency Trading Falls Amid Volatility Drop, Market Probe
John Detrixhe and Neal Armstrong – Bloomberg
Foreign-exchange volumes in the U.S., U.K. and Australia fell in April from a year earlier, according to reports from the world’s biggest central banks, amid subdued price swings and a probe into trading activity.
Average daily currency turnover in North America was $811.1 billion, a 20 percent drop from a record $1 trillion in April 2013 and a 0.6 percent decline from October, the Federal Reserve-sponsored Foreign Exchange Committee said in a statement on its website, citing a twice-yearly survey. In the U.K., April’s $2.4 trillion in turnover was 6 percent below the record high of $2.6 trillion a year earlier, the Bank of England’s Foreign Exchange Joint Standing Committee said. Daily U.K. trading rose 7 percent from October.

Volatility Watch Part Deux
On May 12, 2014, I wrote “Volatility Watch” as part of the T2108 Update for that day. At the time, the volatility index, the VIX, had dropped to the bottom of a trading range in place since the beginning of 2013. I was on alert for a bounce even as I acknowledged volatility could go even lower. Volatility obliged and did BOTH. First it bounced 10% or so and then proceed to hit even lower levels. The last closing low was 10.32 on July 2nd. A bounce and a surge later, and I am “incrementally” more convinced that volatility is finally carving out a sustainable low.


Japan Exchange picks Nasdaq for derivatives revamp
Anish Puaar – Financial News
The exchange group said in an announcement that it plans to replace its current system, also supplied by Nasdaq OMX, in 2016. According to the Japan Exchange its new derivatives exchange will improve risk management functions and allow it to list a wider range of products than is currently possible.
The upgrade is part of a series of improvements made by JPX since it was created by through the merger of the derivatives-focused Osaka Securities Exchange and Tokyo Stock Exchange in early 2013.

SGX says cross-margining key in battle for RMB futures market
Justin Lee – Risk.net
The ability to cross-margin contracts across asset classes will give SGX a competitive advantage with up to 30% margin savings, according to the exchange, although some market players are doubtful this can be achieved
Singapore Exchange (SGX) is launching an RMB futures contract and expects cross-margining benefit with clients’ equity futures portfolio to give it an advantage in the battle for market share with the Hong Kong Exchange which already offers its own CNH futures instrument.

Summer C-Level Series: Ed Tilly, CBOE
CBOE continues to focus on expanding the use of our VIX and SPX products with our existing customers, but ultimately it’s also about broadening the user base.
We tell the SPX story – and the broad market exposure it can provide — every opportunity we get. These conversations are also a launching point to highlight the success of SPX Weeklys, allowing us to tell how new investors are coming into the market and using Weeklys in a completely different way than how SPX options have been used in the past.

Regulation and Enforcement

U.S. derivatives regulator faces test in big courtroom showdowns
Douwe Miedema and Sarah N. Lynch – Reuters
The U.S. federal agency regulating derivatives has fought just three trials since 2011, all against small-time fraudsters in Florida. Now it is poised to take on a series of formidable opponents in the biggest courtroom tests yet of its efforts to crack down on market wrongdoing.
A loss in the courtroom would be a setback for the Commodity Futures Trading Commission as it tries to catch up with its sister agencies, the Securities and Exchange Commission and the Federal Energy Regulatory Commission, which have already adopted more aggressive tactics toward reining in Wall Street excesses.

Mifid II transparency rules to hit derivatives market
Futures & Options World – Let’s Talk Derivatives
Amongst the most sweeping changes introduced under the new Mifid II legislation are those relating to pre- and post- trade transparency for transactions executed on trading venues. Transparency requirements under the existing Mifid regime are limited to shares admitted to trading on a regulated market. These new rules will apply to equity-like instruments, including depositary receipts and exchange traded funds, and many non-equity instruments including bonds, structured finance instruments, emissions allowances and derivatives.


BlackRock: Buy Volatility
Steven M. Sears – Barron’s
BlackRock, the world’s largest asset-management firm, is telling clients that equity-options volatility is now the last cheap asset class in the financial market.
With the CBOE Volatility Index (VIX) at about 11.50, around half of its long-term average of 19, BlackRock is telling clients that the measure should be in the mid- to high-teens. This view is consistent with our previous recommendations that investors buy volatility in anticipation of VIX increases in reaction to shifting Federal Reserve monetary policy or continuing geopolitical instability in Ukraine and the Middle East.

Bet on Twitter’s Earnings Without Putting Up Cash
Steven M. Sears – Barron’s
Twitter has some fundamental business challenges, but one thing makes it more attractive to options traders than almost any other stock: volatility.
When Twitter (ticker: TWTR ) last reported earnings on April 29, the stock fell about 24%, almost triple the previous earnings-related share decline of 9%. In an options market with almost no volatility, and a stock market that moves less than 1% each day, Twitter is an ideal stock for options traders.

Contango And Backwardation Strategy For Inverse VIX ETFs
Nathan Buehler – Seeking Alpha
In this article, we are going to use the same parameters of a contango and backwardation strategy we discussed with iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX). Today we are going to review how this strategy would affect inverse volatility products, specifically VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ:XIV). This strategy would also be effective with ProShares Short VIX Short-Term Futures ETF (NYSEARCA:SVXY).

Tip On Trading Earnings Reports With Binary Options
Gail Mercer – Benzinga
With so many earning reports due out, and because they were expected to be a mixed bag of positive and negative, how could a trader take advantage of these earnings reports?
While a trader could choose to trade the individual stocks or the index for these stocks, volatility can be very high, and with high volatility the trader will experience higher slippage and spreads on both entries and exits.  Additionally, if he enters in the wrong direction, his loss can be quite large.  Is there a better way to trade the earnings reports?

Options Education

Floor Trading History 101: Hand Signals
CBOE Options Hub
With the millions of investors and traders across the country involved in the stock, options, and commodities markets, very few have actually seen these products traded in person. Someone who has never taken a tour of any one of these trading floors is missing out on an art that takes years to perfect yet only seconds to appreciate.



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