JLN Options: VIX and Volatility: Is It ‘Too Quiet’ Out There?; Low volatility sparks concern at Fed over investor complacency; Part III: Facts from OCC, U.S. Options Exchanges Pre- and Post-Trade Risk Principles

May 30, 2014

Lead Stories

VIX and Volatility: Is It ‘Too Quiet’ Out There?
Brendan Conway – Barron’s
Here’s a statistic courtesy of Bespoke Investment Group: Since 1990, the CBOE Volatility Index has been at its current level, or lower, just 4% of time.
The index measures the cost of put and call options on the S&P 500. Puts and calls can be used to guard up your stock portfolio. Hence the moniker the “fear index.” The low level underscores how little investors fear a market correction at the moment.

Low volatility sparks concern at Fed over investor complacency
Low financial market volatility has crept onto the list of concerns weighing on officials at the Federal Reserve.
While the labor market and inflation dominate the Fed’s thinking on the economy, officials fret investor complacency could sow the seeds for disruptive market moves that could undermine the recovery.

Part III: Facts from OCC, U.S. Options Exchanges Pre- and Post-Trade Risk Principles
The Options Insider
Recently, the OCC and the U.S. options exchanges announced their adoption of pre- and post-trade risk control principles. They have been 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.
In this third and final part, we present some additional facts to you about this initiative regarding exchange post-trade risk control, credit controls and OCC post-trade risk control.

Risk institutional investor rankings 2014: Barclays on top
Peter Madigan – Risk Magazine
Institutional derivatives users have relied heavily on their dealers over the past 12 months, as swap market reforms took effect in the US, introducing new liquidity risks. Barclays topped this year’s Risk institutional rankings, ending Deutsche Bank’s four-year tenure at the top.

Are investors dangerously complacent?
John Nyaradi – Wall Street Sector Selector (via USA Today)
Stock market volatility has been in steady decline, and the extreme drop in volatility recently prompted well-known hedge fund manager David Tepper to remark, “I am nervous. I think it’s nervous time.”
Although Tepper believes that now is not the time to be complacent, the VIX is telling us that investors have become very complacent. The stock market advances have been on relatively thin volume, while the declines have been on heavier volume. This sends a signal that the bull is feeling a bit lackadaisical.

Tranquil markets are enjoying too much of a good thing
Gillian Tett – Financial Times
Something peculiar is happening in western capital markets. This month almost every measure of volatility has tumbled to unusually low levels. If you look at the degree of actual (or “realised”) price swings – and projected (or “implied”) future movements – investors are behaving as if the world is utterly boring.
This is bizarre. Financial history suggests that at this point in an economic cycle, volatility normally jumps; when interest rate and growth expectations rise, asset prices typically swing (not least because traders start betting on the next cyclical downturn). And aside from economics, there are plenty of geopolitical issues right now that should make investors jumpy.

Videocast: Is 11 the floor for VIX?

Beware of Exotic ETFs Bearing Credit-Default Swaps
Lisa Abramowicz – BloombergBusinessweek
If you’ve always wanted to bet your savings on risky credit derivatives, now’s the time. In May regulators signed off on a plan to allow trading in eight exchange-traded funds (ETFs) created by ProShares that will hold credit-default swaps—the derivatives that helped bring on the global credit crisis in 2008.

Worried About A Low VIX?
Cam Hui – Investing.com
Recently there has been a lot of hand wringing about the low level of the VIX Index. Volatility has crashed and the VIX Index has broken critical technical support at the 12 level. Indeed, The Economist’s Buttonwood Blog  voiced concerns about the low level of volatility in the markets:


CBOE RMC Returns to Europe This Fall
Marty Kearney – CBOE Options Hub
The annual CBOE Risk Management Conference (RMC) is the premier financial industry conference designed for institutional users of equity derivatives and volatility products.  Now in its 30th year in the U.S., CBOE will be hosting the 3rd annual CBOE RMC Europe September 3 – 5, 2014 in County Wicklow, Ireland (outside of Dublin).

Cornerstones clear the way for ICE exit
IntercontinentalExchange has convinced 11 European financial institutions to take a substantial stake in Euronext, absolving it of a promise to retain a quarter of the company for at least three years.
The seller has satisfied European regulators by assembling a group of cornerstone investors to take its place. They will acquire up to a third of the company at a small discount to the IPO pricing while agreeing to a three-year lock-up period.

Regulation and Enforcement

High-Speed Trading Perks Said to Be Focus of CFTC Review
Matthew Leising – Bloomberg
The Commodity Futures Trading Commission is seeking detailed information on the incentives that U.S. derivatives exchanges such as CME Group Inc. and IntercontinentalExchange Group Inc. offer to spur trading, according to a person familiar with the matter.
The CFTC wants to know who gets trading fee discounts, how much money they save, and whether programs to reward early adopters of new futures contracts ever end, according to the person, who asked to not be named because the review is private.

CFTC Should Reconsider Gensler Advisory, Wetjen Says
Silla Brush – Bloomberg
The main U.S. derivatives regulator should consider revising a policy that helped prompt a lawsuit by Wall Street lobbying groups because it extended the reach of rules to deals arranged in the country but held overseas, the agency’s acting chairman said.
The Commodity Futures Trading Commission should look at changing or withdrawing the November advisory, released under former chairman Gary Gensler, that sought to curb bank efforts to skirt the 2010 Dodd-Frank Act by automatically applying the trading rules to such transactions, Mark P. Wetjen, the acting chairman, told reporters after a speech at a legal conference in Washington yesterday.


Options Strategies For A Low-Volatility Market
Mark Wolfinger – Barron’s
The casual observer would assume that all is well in the investing world. The major market indexes are making new all-time highs. The CBOE Volatility Index, or VIX, sometimes referred to as the fear gauge, is trading at a relatively low level, suggesting that traders have little fear of a severe market decline.

Options Education

How Time Decay in Options Can Be Your Best Friend – Know Your Options
Zacks (via NASDAQ)
Today let’s talk about one of the ‘Greeks’ in options trading that doesn’t get enough coverage — and that’s Theta.
Theta measures how much value an option will lose each day due to the passage of time as the option gets closer to expiration. This is known as time decay.

Why Trade Nadex Spreads, Versus Future Options?
Darrell Martin – Benzinga
Stock Market Quotes, Business News, Financial News, Trading Ideas, and Stock Research by Professionals
How does a longer expiration lead to more risk and less profit?
The yellow highlighted portions on the chart below demonstrate the cost difference for an ES call option. It compares an example, that is ready to expire that day (on a Friday) at $1.40, to the cost of one that is a week out at $10.
What is significant here is that, unless a trader is doing the ES call or put option on Friday, to expire that Friday, they can’t get them the same day. They are only weekly.


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