JLN Options: VIX Closes Below 12; Is That Bullish?; Is Wall Street Pulling a Fast One?; How low can volatility go? Wall Street laments 'brutal churn'

May 22, 2014

Lead Stories

VIX Closes Below 12; Is That Bullish?
Tomi Kilgore and Stephen Grocer – WSJ
The seventh try proved the charm.
The CBOE’s Volatility Index, or VIX, closed below 12 for the first time since Aug. 5, 2013. It finished down 8.1% at 11.91.
The stock market’s so-called fear gauge has roughly remained around 14 for much of the year, well below its long-term average of about 20. In the nine months since it last closed below 12, the VIX has crossed below that level intraday six times before Wednesday. The lowest previous close was 12.13 on May 13.

Is Wall Street Pulling a Fast One?
Leah McGrath Goodman – Newsweek
When members of the House Financial Services Committee grilled Mary Jo White, the head of the Securities and Exchange Commission (SEC), all they wanted to talk about was a book: Michael Lewis’s Flash Boys.
“So you’ve heard all the stories in the paper, in the news,” said Representative Scott Garrett, a Republican from New Jersey and chairman of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises. “Can you tell us, Are the markets rigged?”

How low can volatility go? Wall Street laments ‘brutal churn’
Bob Pisani – CNBC
Active traders are getting chopped up by a market that lacks direction or any clear trend. Call it the year of the churn.
Volumes are near their lowest levels of the year. On Wednesday, the CBOE Volatility Index closed below 12, the lowest level of the year. Meanwhile, fixed income yields are staying low from deflationary concerns and lower than expected economic growth.
No real volume, low volatility, and no trend. It’s a killer for the trading community.

Demystifying The VIX Myth
Nitin Gulati – Seeking Alpha
Recent financial crisis provoked an interest in tail risk hedging strategies which create positive payoffs during financial turmoil, creating widespread popularity of VIX. Broadly known as “investor fear gauge” VIX measures 30 days expected volatility of the S&P500 (SPY) index by averaging the weighted prices of SPX puts and calls over a wide range of strike prices.

Are We Due for a Volatility Spike?
What the ‘low volatility begets high volatility’ adage means for today’s market
Adam Warner – Schaeffer’s Investment Research
I think it’s safe to say that at least as far as big-caps are concerned, everyone knows we’re in a churning market. And it took a while, but that churn is now characterized by drifting volatility, as proxied by the CBOE Volatility Index (VIX) and all its tradable offshoots.
But is this just the volatility calm right before the volatility storm? Andrew Kassell, a.k.a. @Andrewunknown on Twitter, says “yes” in a post over on See It Market. He looks at the S&P 500 Index (SPX) through the lens of Bollinger Band widths.

Andrew Giovinazzi Of Option Pit Talks Options Strategies
Jayson Derrick – Benzinga
Andrew Giovinazzi is the COO of Option Pit. He previously served as a member of both the Pacific Exchange and the Chicago Board Options Exchange where he acted as a market maker in both equity and index options.
Giovinazzi has a wealth of knowledge to share and was a guest on Benzinga #Premarket Prep on May 19.
“First you have to know what you are doing with options,” said Giovinazzi. “They provide a tremendous amount of leverage for the dollar.”

Videocast: Is 12 the VIX bottom?

Why Is This Market So Boring?
Anthony Mirhaydari – InvestorPlace
Aside from a few temporary jolts of excitement, the S&P 500 has pretty much gone nowhere so far this year, and it’s trading in a narrowing consolidation range: We haven’t seen a move of 2% or more (up or down) since April 10.
Sure, small-cap stocks have been on the slide (down 5.3% year-to-date) and emerging-market stocks have been on a roll (up 2.6% year-to-date). But for the S&P 500 — the most commonly followed measure of the stock market — nothing much is happening.
So … how much longer will stocks be stuck in the doldrums?

Collateral shortfall: mountain or molehill?
Neil A. O’Hara – FTSE Global Markets
Ever since regulators first proposed that most OTC derivative contracts should settle through central clearing counterparties (CCPs) market participants have predicted a massive shortfall in the amount of high quality collateral available to meet CCP margin requirements. Doomsayers bandied about numbers of Brobdingnagian proportions—in the trillions—that would drive up costs, perhaps to the point where some derivative trades would become uneconomic. The clearing mandates began to take effect last year (at least in the United States) but so far the dire predictions have failed to materialise. The picture could change—the clearing requirements will not be in full force globally for several years—but the scale of any shortfall, if not Lilliputian, is unlikely to pose a major threat.


ISE Launches Do Not Trade Through Functionality for Multi-Legged Orders
Press Release (International Securities Exchange)
ISE announced today the launch of Do Not Trade Through (DNTT) functionality, a new price protection for multi-legged orders. Orders marked as DNTT will only trade at or better than the National Best Bid or Offer (NBBO) on each leg of the multi-legged order, including option and stock legs. DNTT orders do not trade through away market prices on any leg. ISE is the only exchange to offer this protection for both incoming and resting multi-legged orders.

CBOE Holdings, Inc. Announces 2014 Annual Meeting Results
Press Release (CBOE)
CBOE Holdings, Inc. (NASDAQ: CBOE) announced the stockholder voting results from its 2014 Annual Meeting held today. 
All 13 board of director nominees received a majority of votes cast, with at least 96 percent of the votes cast “for” each of the nominees.

CME vows to keep trading pits open if electronic platform fails
Tom Polansek – Reuters
CME Group Inc on Wednesday pushed back against calls for it to close open-outcry trading if its electronic platform fails, saying that most traders have access to the pits.
“To close down the floor because the electronic platform closed down, I don’t know why we would do that, unless there was a circumstance that warranted closing all the markets,” Executive Chairman Terry Duffy told reporters following the company’s annual meeting.

Top Exchange and Clearinghouse Leaders to Assemble in Moscow, Russia for WFE-IOMA Annual Derivatives Conference
Press Release (via Business Wire)
Exchanges and clearinghouse leaders will assemble in Moscow next week for the World Federation of Exchanges’ (WFE) 31st annual derivatives conference, the International Options Market Association (IOMA). The conference, which will take place 26-28 May, will be a forum for the discussion of key regulatory issues affecting the global derivatives landscape. The WFE-IOMA conference will also partner again this year with the Global Association of Central Counterparties, (CCP12) to offer a half-day of combined sessions that will focus on the new challenges facing the clearing markets.

Regulation and Exchange

FTT faces legislative maze
Anish Puaar – Financial News
The proposed European financial transaction tax could be split into two separate pieces of legislation that cover different financial instruments, in order to ensure the levy is introduced at the start of 2016.

Markets Brace for Change as EU Unveils 800-Page Rule Book
Ben Moshinsky and Jim Brunsden – Bloomberg
Europe’s capital markets are getting a new foundation.
The 28-nation European Union’s top markets regulator today made public more than 800 pages of proposed rules that cover everything from high-frequency trading curbs to transparency requirements for bond markets and position limits for commodity derivatives, with the aim of boosting confidence in the financial system.

Exclusive: SEC probes Schwab, Merrill, for anti-money laundering violations – sources | Reuters
U.S. regulators are investigating Charles Schwab Corp and Bank of America Corp’s Merrill Lynch brokerage over whether they are doing enough to learn about their clients’ identities, sources said, the latest sign a crackdown on money laundering is expanding.


Low Volatility: How To Profit From a Quiet VIX
Bill Luby – Barron’s
Before the 2008 financial crisis, only a small group of investors paid attention to the CBOE Volatility Index, or VIX, and those who did have it on their radar generally used it as a barometer of how much panic was in the markets.
During the past few years, however, the VIX has gone from obscure to ubiquitous, and now a broad range of investors routinely keep tabs on the VIX in real-time to evaluate market sentiment.

Options Education

Trading Options on Futures Contracts
Cory Mitchell – Investopedia
Many futures contracts have options attached to the them. Gold options, for example, are based on the price of gold futures (called the underlying), both cleared through the Chicago Mercantile Exchange (CME) Group. Buying the future requires putting up an initial margin of $7,150–this amount is set by the CME, and varies by futures contract–which gives control of 100 ounces of gold. Buying a $2 gold option, for example, only costs $2 x 100 ounces = $200, called the premium (plus commissions).



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