JLN Options: VIX Heading for Biggest Two-Day Jump Since April; Option Skew at 2 1/2-Year Low Signals Treasuries Rise, BofA Says; Why trading volume is tumbling, explained in 5 charts

Jul 8, 2014

Lead Stories

VIX Heading for Biggest Two-Day Jump Since April
Callie Bost and Joseph Ciolli – Bloomberg
The VIX (VIX) had the biggest two-day increase in three months as losses in technology and small-caps fueled a selloff across the U.S. stock market.
The Chicago Board Options Exchange Volatility Index, known as a “fear gauge” because it tracks the cost of Standard & Poor’s 500 Index options, rose 10 percent to 12.50 as of 12:22 p.m. in New York, reaching the highest level in three weeks. The gauge is up 21 percent in the past two days.

Option Skew at 2 1/2-Year Low Signals Treasuries Rise, BofA Says
Liz Capo McCormick – Bloomberg
Long-term Treasuries are poised to rally as the skew in option volatility reached the lowest since 2011, signaling wagers for higher yields have become overdone, according to Bank of America Corp.
Positioning for higher Treasury yields amid signs of an improving labor market and rising inflation has spurred hedging of those bets through purchases of options that profit if rates fall, causing the so-called skew to fall, Bank of America analysts said.

Why trading volume is tumbling, explained in 5 charts
Victor Reklaitis and Anora Mahmudova – MarketWatch
Where have all the traders gone? That’s been a common refrain in the last few years for many market watchers. These folks worry that lower trading volumes for U.S. stocks might indicate a disturbing lack of confidence in the market, even as stock prices march higher and the Dow Jones Industrial Average DJIA -0.26% cracks 17,000.

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Videocast: VIX sees heavy volume

Horizon debuts China’s first options trading system
The Trade
News | Operations & Technology | Trading tools | thetradenews.com
The first options trading system to be made available to the Chinese market has been introduced by Horizon Software.
The front-end trading solutions provider received the Chinese Government’s mandate three years ago in advance of the opening of the country’s options markets.

China moves cautiously towards options market launch this year » Banking Technology
 Elliott Holley – Banking Technology
Historically, the Chinese securities market has been tightly controlled and regulated by the ruling Communist Party of China. Access for foreigners has been restricted and managed by a quota system, with no licences granted except via government permission. Although equities and futures are traded in Hong Kong, Shenzhen and Shanghai, there has been no functioning options market.

High-Speed Trading Risk Blamed on U.S. Regulations
Dave Michaels and Cheyenne Hopkins – BloombergBusinessweek
A technology arms race that risks destabilizing U.S. stock markets has emerged because of regulations intended to promote competition among the exchanges, Wall Street executives will tell a Senate committee.
The Securities and Exchange Commission’s rules for a national market system have come under scrutiny as lawmakers examine whether high-frequency traders have exploited changes introduced by regulators, exchanges and brokers.


Intercontinental Exchange Chairman and CEO Sprecher to Testify on Market Structure Panel
Press Release (ICE)
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, announced today that ICE Chairman and CEO Jeffrey Sprecher will appear before the U.S. Senate Banking, Housing and Urban Affairs Committee tomorrow to participate on an equity market structure panel.
The hearing is scheduled for 10 am ET on Tuesday, July 8 in room 538 of the Dirksen Senate Office Building and the webcast and testimony is expected to be available at http://www.banking.senate.gov/.


Intercontinental Exchange Selects Morningstar to Provide Financial Data for the Redesigned NYSE.com
Press Release (via MarketWatch)
Intercontinental Exchange (ICE) has selected Morningstar, Inc. MORN -2.06% , a leading provider of independent investment research, to provide comprehensive financial data and web solutions for the New York Stock Exchange’s redesigned website, www.nyse.com .
ICE is a leading global network of regulated exchanges and clearing houses for financial and commodity markets, which includes the NYSE and four additional cash equity and equity options exchanges. NYSE Group operates the leading combination of equities trading venues with the most liquidity of any global exchange group.


IB Traders’ Insight
Andrew Wilkinson – Interactive Brokers
Tuesday brings a second sharp drop in equity prices without much reasoning. If anything, losses for stocks grew following news from the National Federation of Independent Business that its monthly survey raised a red flag over capital spending and a generally weak sales environment.

Why I Don’t Like To Buy S&P 500 Puts As ‘Insurance’ – A Rebuttal
Jason Russ – Seeking Alpha
Parsimony Investment Research recently wrote an article on SA that advocated buying puts on the S&P 500 (SPY) in order to hedge a portfolio. I agree with everything in the article – and I am a fan of the author in general – with the exception of the conclusion that SPY puts are a good hedge for many investors.
In addition, I wrote an article a few days ago titled “How To Prepare For The Upcoming Correction” that outlined some alternate ideas for investing in an overvalued market. Puts might be a good idea in certain unusual situations, but in general I don’t think they are the best way to go.

Options Education

A layman’s guide to trading the VIX
Andreas Clenow – TradingFloor.com
When you trade the VIX index, you don’t really trade the VIX index. No, that’s not a typo, dear editor. The VIX index itself is not tradeable, just like the S&P 500 index is not tradeable. You can of course trade products based on either of these indices. Most products based on the S&P 500 index track that index very closely, so the difference is slight enough to almost be ignored. But for the VIX, it’s a whole different matter.
It’s all implied, really.

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