JLN Options: Traders Gorging on Campbell Calls Amid Deal Speculation; Credit Swaps Polished in $19 Trillion Derivative Overhaul; Heavy foreign buying in India's options points to big move

Aug 20, 2014

Lead Stories

Traders Gorging on Campbell Calls Amid Deal Speculation
Joseph Ciolli and Lu Wang – Bloomberg
Options traders are doubling down on bets that Campbell Soup Co. is the next big takeover candidate.
Bullish calls on the stock are close to the most expensive in history compared with bearish puts, according to data on three-month contracts compiled by Bloomberg. In the morning of Aug. 18, a block of 5,500 calls that pay off if Campbell rallies more than 8 percent in the next month changed hands on the ask price, indicating that a buyer initiated the trade, according to data compiled by Bloomberg. The transaction was nine times more than call volume over the past 20 days.

Credit Swaps Polished in $19 Trillion Derivative Overhaul
Abigail Moses – BloombergBusinessweek
The biggest overhaul to the $19 trillion credit derivatives market in more than a decade will seek to solve flaws that have stopped some contracts paying out as buyers anticipated.
The changes come too late for investors in the junior debt of Banco Espirito Santo SA, whose credit-default swaps were devalued this month when the Portuguese lender was rescued and restructured by the government. Since the contracts are tied to the majority of a company’s debt, if the borrower is reorganized the swaps don’t necessarily stay tied to the securities they’re meant to protect.

Heavy foreign buying in India’s options points to big move
Overseas investors bought Indian equity derivatives worth 41.22 billion rupees ($677.4 million) on Tuesday, NSE data shows.

VIX attracts unusual call spread
Chris McKhann – optionMONSTER
A complex call spread topped heavy option volume in the CBOE Volatility Index yesterday.
A block of 134,300 October 16 calls traded for $1.10, while the same number of January 20 calls changed hands for $1.37, according to optionMONSTER systems. Previous open interest was below 50,000 in each strike, so this is clearly new positioning.

ETF Investors Shrug Off Volatility in Bullish Conditions
Max Chen – ETF Trends
In an environment of extended low implied volatility as reflected by the CBOE Volatility Index, the equities market and stock exchange traded funds continue advancing as investors take advantage of pullbacks and buy the dip.
Currently, the drop in implied volatility corresponds with rising market conditions. The VIX is hovering back around 12.2 Wednesday, compared to historical average of 20. According to the CBOE, the VIX has averaged around 10.4 so far this year.

Nervous Hedge Funds Turn Defensive on Concerns Over Asset Prices
Laurence Fletcher – WSJ
Nervous hedge funds are cutting back on their riskier positions, because of fears that some assets may have become overpriced and concerns about the conflicts in Ukraine and Iraq.
Some hedge funds have reduced their bets that equities will keep rising, increased bets on falling bond prices and bought protection for their portfolios in case the crises escalate further, according to investors and money managers.

Investors basically have no fear about volatility
Jeff Cox – CNBC
Forget the headlines, forget the charts: Despite the loopy stock market behavior recently, investors are downright apathetic about the way things are going.
If you looked at the values of the S&P 500 over the past 30 days, little has changed. The stock market index opened at 1,976 on July 21; it opened just 5 points above that level Wednesday. In between, though, the market turned and churned.

Learning To Love Good Volatility
Rick Ferri – ETF.com
There’s nothing like good market volatility. It makes me sleep well at night. Plunging prices, several days of bad news, it makes me all smiles. No, I’m not a masochist. I just know that weak-minded investors become nervous and sell in a roller-coaster market, and that gives me more opportunities to buy at cheap prices.

Barclays offers choice of risk in Euro Stoxx 50 note
Suzi Hampson – Risk.net
Barclays is offering US investors two versions of a product based on the Euro Stoxx 50 – one with capital protection and another that puts capital at risk in return for higher potential gains
Barclays Bank has launched two structured products in the US, both of which are linked solely to the Euro Stoxx 50 index. Both are dependent on the index performing well, but will appeal to different types of investor.

Carl Icahn Drives Into Hertz, Says He Lacks Confidence In Management
Nathan Vardi – Forbes
Carl Icahn disclosed an 8.48% stake in Hertz Global Holdings HTZ -3.9% on Wednesday after the rental car company’s stock was rocked because of its latest mishap—operational problems that caused the company to withdraw its financial guidance for 2014.
A Securities & Exchange Commission filing showed that Icahn had been building a stake in Hertz through call options throughout July and August and added to that position on Wednesday after shares of Hertz plunged by some 11%.


Finextra: Euronext preps equity options
Press Release (via FinExtra)
Today Euronext announced that trading in equity options on Euronext N.V. shares will start on the Amsterdam derivatives market as of Thursday 28th August.
The new options will be listed in the Spotlight Options section, Euronext’s special segment dedicated to the development of new option classes requested by market participants. Spotlight Options give visibility to underlying assets such as newly listed stocks, SME’s and/or assets with notable market events or activity. Through a unique combination of Liquidity Provider support and dedicated promotion by Sponsoring Brokers, underlying assets are put in the spotlight with short-term maturities options of one, two and three months.

Regulation and Enforcement

New Emir Reporting Requirements Kick In
Trade repositories have received millions of valuation reports under the new reporting regulations which came into effect under the European Market Infrastructure Regulations last week.
Since February, both sides of derivatives deals in Europe have been required to report over-the-counter and exchange-traded derivatives to one of six approved trade repositories under the Emir.

Foreign-Exchange Industry Calls for Tougher Rules
Chiara Albanese – WSJ
The foreign-exchange industry is calling for tougher rules for traders as well as the overhaul of a key benchmark to make it less vulnerable to manipulation.
The demands, included in written statements from more than 30 global asset managers, pension funds, banks and others, come as the currencies market labors under the shadow of a global investigation that has partly focused on allegations of benchmark-rigging.
***JB: Careful what you wish for, you just might get it.

Options Education

Quantifying VIX Contango and Backwardation
Russell Rhoads – CBOE Options Hub
I’m in the process of updating different VIX related charts and statistics for next week’s three day VIX webcast series. I realized it has been a while since I addressed the topic of VIX contango and backwardation.   For those unfamiliar with these terms, a picture is worth a thousand words. The term structure illustration below shows a textbook example of what contango and backwardation are all about.

Trading VIX: The Devil’s In the Details
Adam Warner – Schaeffer’s Investment Research
I’ve asked a recurring question in these pages over the years: Why do CBOE Volatility Index (VIX) futures always trade in contango?
VIX is a mean-reverting asset. The long-term trend is a flat line. It has its up regimes and down regimes, but at the end of the day, it’s not a stock with earnings that grow over time. It’s a statistic. Yet, we always see traders anticipate it will lift — or so it seems.


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