JLN Options: US options markets surge on August volatility; IMF’s Lagarde warns of spillover risks from recent volatility; OPEC Split on Need for Long-Term Oil-Price Forecasts

Sep 2, 2015

Observations & Insight

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New rules and guidelines and a couple of recent high profile criminal cases on disruptive trade practices have made compliance and supervision a high priority at trading firms and clearing firms. Lisa Dunsky, derivatives attorney and former counsel at CME Group, shares her insights on what firms and traders need to consider.
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Lead Stories

US options markets surge on August volatility
Cian Burke – Futures & Options World
The US options market posted a third consecutive month of gains in August, as volumes surged on the back of extreme market volatility following a correction in the US equities markets.
The Options Clearing Corporation (OCC), which clears the entire US equity options suite, reported cleared contract volumes reaching 426 million contracts up a third from August 2014.

IMF’s Lagarde warns of spillover risks from recent volatility
Randy Fabi, Gayatri Suroyo and Nicholas Owen – Reuters
Recent volatility in global financial markets shows how rapidly risks can spill over from one economy to the next, the managing director of the International Monetary Fund (IMF) said in Jakarta on Wednesday.

OPEC Split on Need for Long-Term Oil-Price Forecasts
Golnar Motevalli, Grant Smith and Wael Mahdi – Bloomberg
Saudi Arabia and its Gulf allies are at odds with Iran and other OPEC members over whether the organization should include oil-price forecasts in its long-term strategy report, according to three of the group’s delegates.

Options Traders See Doom for Rand as Analysts Predict Rebound
Xola Potelwa – Bloomberg
While analysts forecast the worst may be over for South Africa’s rand, options traders are at their most bearish on the currency in more than three years.

Obscure NYSE rule to curb panicky trading lights up the Internet
Shawn Langlois – MarketWatch
When the stock market opened deep in the red early Tuesday morning, investors frantically searched for explanations, as they tend to do during times like these. Is it China again? How long will this volatility last? Will the Fed do anything to fix it? Sell everything? Buy everything? Throw your arms up in despair!
But amid the din of familiar questions, “Rule 48” began to trend on Twitter. That’s right, the obscure trading rule that’s popped up more frequently lately took its place alongside such trending hashtags as #TravelTuesday and #BackToHogwarts.

A Perplexing VIX Theoretical
Adam Warner – Schaeffer’s Research
About that CBOE Volatility Index (VIX) shutdown last week: In one sense, it’s of course meaningless. I mean, you really don’t need the VIX up there at all times to tell you volatility is exploding. But in another sense, it could lead to some serious problems.

Gold options traders on high alert in uncertain market
Ole Hansen – TradingFloor.com
After hitting a multi-year low in July gold rallied strongly as the global rout in stocks and emerging market currencies triggered a revision of the near-term direction. But after hitting trend-line resistance last week at $1,169 the yellow metal has become increasingly boxed in. However, yesterday’s renewed stock market weakness that was driven by weaker economic data from both China and the US only gave the metal a modest boost.
Against that background, let’s take a look at the options market in order to gauge the current sentiment and to seek clues about where we might be heading from here.

Oil market displays its irrational side: Kemp
John Kemp – Reuters
U.S. crude prices jumped more than 27 percent in three trading days between Thursday and Monday, which should convince even the most die-hard believers the oil futures market is neither efficient nor rational.
The rally has left traders, analysts and journalists struggling to make sense of the sudden change in direction after prices had fallen steadily for two months, hitting their lowest level since 2009.

ETF Performance Report: August
Tom Lydon – ETF Trends
U.S. equities and stock exchange traded funds were moseying along during most of August but experienced a precipitous plunge in the later half of the month after volatility in China and an unclear Federal Reserve policy outlook triggered a market correction.

HNIs losing on option bets, but soaring premium a big draw
Ram Sahgal – Economic Times
Ultra-rich investors have emerged as counterparties to foreign investors in trades that could potentially backfire on them if volatility spikes from current highs.
Lured by option prices trading at sixteen-month highs and the empirical fact that option sellers make money 7 out of 10 times, these investors are aggressively selling (or writing) index put options, said derivatives analysts. A buyer of a call option bets the markets will rise, while a buyer of a put option bets the market will fall and seeks to hedge her underlying portfolio. The seller collects premiums, price for selling options, from the buyer.

UBS Said to Hire Ex-Deutsche Bank Trader Merran for Derivatives
Alastair Marsh – Bloomberg
UBS Group AG hired Melvyn Merran to trade credit derivatives that are processed through clearinghouses, according to a person familiar with the matter.


Options Market Share – August 2015 courtesy of OCC:

August 2015 Total Options Marketshare:
AMEX- 7.43%
BATS- 10.89%
BOX- 2.24%
CBOE- 26.05%
C2- 1.82%
GEM- 2.57%
ISE- 12.05%
MIAX- 5.92%
NOBO- 0.79%
NSDQ- 6.21%
NYSE Arca- 10.38%
OMX PHLX- 13.64%

August 2014 Total Options Marketshare:
AMEX- 11.25%
BATS- 5.26%
BOX- 2.62%
CBOE- 27.49%
C2- 2.04%
GEM- 3.35%
ISE- 10.84%
MIAX- 3.38%
NOBO- 0.70%
NSDQ- 8.74%
NYSE Arca- 9.26%
OMX PHLX- 15.08%

August 2015 Equity Options Marketshare:
AMEX- 8.46%
BATS- 12.42%
BOX- 2.56%
CBOE- 15.88%
C2- 2.02%
GEM- 2.93%
ISE- 13.65%
MIAX- 6.76%
NOBO- 0.90%
NSDQ- 7.08%
NYSE Arca- 11.82%
OMX PHLX- 15.51%

August 2014 Equity Options Marketshare:
AMEX- 12.37%
BATS- 5.87%
BOX- 2.92%
CBOE- 19.53%
C2- 2.26%
GEM- 3.73%
ISE- 12.05%
MIAX- 3.77%
NOBO- 0.78%
NSDQ- 9.74%
NYSE Arca- 10.21%
OMX PHLX- 16.78%

CBOE Holdings Reports August 2015 Trading Volume
Press Release – CBOE
CBOE Holdings, Inc. reported today that total trading volume in August for options contracts on Chicago Board Options Exchange and C2 Options Exchange and futures contracts on CBOE Futures Exchange was 125.2 million contracts, an increase of 18 percent from July 2015 and an increase of 26 percent from August 2014.

CME Group Volume Averaged 16.3 Million Contracts per Day in August 2015, Up 25 Percent from August 2014
Press Release – PRNewswire
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that August 2015 volume averaged 16.3 million contracts per day, up 25 percent from August 2014, and included average daily volume of 23 million contracts during the last week of the month, the highest weekly average ever. Total volume was more than 341 million contracts, of which a record 89 percent was traded electronically. Options volume in August averaged 3 million contracts per day, up 27 percent versus August 2014, with electronic options growing 37 percent over the same period to a record 57 percent electronic.

OCC Cleared Contract Volume Rose 33% in August
Press Release – OCC
OCC, the world’s largest equity derivatives clearing organization, announced today that cleared contract volume in August was 434,313,474 contracts, up 33 percent from August 2014 volume of 325,548,099 contracts. OCC’s year-to-date average daily cleared contract volume is up 0.15 percent from 2014 with 16,809,864 contracts in 2015.

ISE Reports Business Activity for Aug 2015
Press Release – ISE
International Securities Exchange Holdings, Inc. today reported a combined average daily volume (ADV) of 3.0 million contracts in August 2015 for its two exchanges, ISE and ISE Gemini. This represents 16.6% of U.S. equity options market share.

Moscow Exchange’s FX Volume Up 10% MoM In August 2015, 86.7% YoY
Avi Mizrahi – Finance Magnates
The Russian venue Moscow Exchange (MOEX) announced today its trading volumes for August 2015. The Derivatives Market and FX Market posted the strongest growth, with volumes increasing 200.9% and 86.7% YoY, respectively. Equity trading volumes rose 17.4% YoY. Trading volumes on the Precious Metals Market increased nearly 7 times YoY to RUB 10.7 billion. Turnover was RUB 10.7 billion (4.6 t) for gold and RUB 4.6 million (143 kg) for silver.

Regulation & Enforcement

US options markets seek comment on trading reform
Luke Jeffs – Futures & Options World
The top US options exchanges are seeking to increase the pressure on the US government to water-down a controversial plan that could stop some US pension holders from trading options by taking the unusual step of calling on investors to oppose the proposal.
The Options Clearing Corporation, which clears for the top US options markets, has posted a notice on its website calling on individuals to comment on the proposed rule changes by the US Department of Labour while the consultation period is still open.

PBOC Said to Include Swaps, Options in Yuan Reserve Requirement
Xola Potelwa – Bloomberg
China stepped up its efforts to stifle swings in the yuan, with the central bank said to include currency derivatives other than forwards in a new reserve-requirement mandate.


Compliance focus drives technology, budget boosts
Alice Attwood – Futures & Options World
Companies’ increased focus on compliance functions is leading firms to up budget allocations and upgrade technology infrastructure to ensure that they are monitoring the increasingly complex financial markets, according to global exchange Nasdaq’s Smarts business.
There has been a shift in attitudes toward compliance, said Rob Lang, vice president and head of product management, risk and surveillance solutions at the exchange group’s market surveillance unit.


May the Next Voice You Hear Be Your Own
Peter Lusk – CBOE Options Hub
Contrarian: A person who takes an opposing view. One who rejects the majority opinion as in economic matters.
What an emotional business this is. The uneasy market sell-off continued today with option implied volatility climbing higher. Radio and TV experts have no problem pumping fear into the average investor’s head. Fright sells. RIP Wes Craven.

Selling Volatility: Fun, Profitable, Not!
Tracy Alloway – Bloomberg
As Bloomberg News reports on Tuesday an inverted VIX curve is rather creepy. In normal times, the term structure of the Vix, affectionately known as Wall Street’s fear gauge, would be expected to slope from the bottom left to the top right, as in the green line of this chart (as it looked at the end of July. Orange is from the end of August).

Death cross’ patterns spread to all corners of the stock market
Tomi Kilgore – MarketWatch
“Death cross” patterns continue to spread through the stock market like an epidemic, even infecting market segments believed to be more insulated from overseas turmoil.

Indicator of the Week: Why the S&P’s Correction Has a Silver Lining
Rocky White – Schaeffer’s Research
The S&P 500 Index (SPX) recently experienced its fourth 10% pullback — typically called a “correction” — since the 2008 crash. The previous three pullbacks of this magnitude proved to be great buying opportunities. Whether this one is over or not remains to be seen. For this article, I’m going to work under the assumption that we bottomed last Monday. In that case, which stocks might we see perform the best going forward?

VIX Futures Point to More Pain for S&P 500 Bulls
Oliver Renick, Chris Nagi and Anna-Louise Jackson – Bloomberg
This time it’s different.
From charts to earnings forecasts, indicators that signaled the end of past U.S. equity selloffs are providing less comfort in this one. Take futures on the Chicago Board Options Exchange Volatility Index, a source of calm in previous routs whose message looks a little less convincing today.


China Shock Boon for This Hedge Fund That Bets on Volatility
Netty Idayu Ismail – Bloomberg
36 South Capital Advisors, a London-based volatility hedge fund, profited from China’s surprise devaluation when it triggered a global market rout that spurred losses in an index of its peers.
Three of 36 South’s strategies, which bet on rising price swings, gained more than 10 percent in August, based on initial estimates, Chief Investment Officer Jerry Haworth said in an interview. That would be the best monthly return in at least three years for its main fund, according to the manager. The HFRX Global Hedge Fund Index dropped 2.2 percent last month.

ETF Volatility Curbs Worked By Design In Last Week’s Crash – Is The Design Sound?
Chris Dieterich – Barron’s
Many questions linger after the mini flash crashes that roiled a broad swath of exchange-traded funds on Aug. 24. Many ETFs fell far below the value of their baskets of stocks.
Barron’s readers can get the run-down for what happened here, and some advice for how to think about dealing with ETFs here.

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