JLN Options: VIX Hits 28 – Highest since 2011; U.S. options volume at highest since 2011 as volatility soars; Stocks Turn Volatile on Global Growth Worries

Oct 15, 2014

Observations and Insight

Craig Donohue, executive chairman, OCC – Clearing Today and Tomorrow

“When we first came into the industry, clearing, I guarantee you, was not sexy at all.”

Craig Donohue, executive chairman of OCC, begins by giving a quick overview of OCC and highlighting its achievements with equity derivatives contracts and margin collateral. He then goes on to discuss challenges in industry, including the 2008 financial crisis and the G20 response to shifting more risk to central counterparties. Donohue also explains what a systemically important financial market utility is, and what challenges OCC and other SIFMUs face in the future.

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Lead Stories

VIX Hits 28 – Highest since 2011
The Options Insider
Stocks are sinking today (Wednesday, October 15, 2014) as fears of a global slowdown are further set in. Dangerously low inflation in Europe and ripples from a steep drop in oil prices are both impacting the downturn.  Feeding the gloom this morning was a weaker-than-expected report on U.S. consumer spending. Traders said swings across financial markets appeared to be magnified by investors—particularly hedge funds—scrambling to exit money-losing investments.

U.S. options volume at highest since 2011 as volatility soars
Saqib Iqbal Ahmed – Reuters
Growing concerns about the economy and markets sent volatility soaring on Wednesday and pushed trading volume in the U.S. options market to its highest level in more than three years, as traders moved to hedge their portfolios on fear of further market gyrations.
The CBOE VIX index – the stock market’s “fear gauge,” – rose to touch 31.06, its highest level since December 2011, before pulling back to close at 26.25.

Stocks Turn Volatile on Global Growth Worries
Peter Eavis and Landon Thomas Jr. – NY Times
Wall Street had for the most part shrugged off a recent slide in global stock markets, viewing the declines as an adjustment that was bound to take place after so many years of uninterrupted gains.
That complacent view was upended on Wednesday.
Waves of nervous selling rocked the stock market in the United States, following an earlier sell-off in Europe. Yet the major market measures, after being down more than 2 percent earlier in the day, recovered in the last half hour of trading. At the close, the benchmark Standard & Poor’s 500-stock index was down 0.81 percent, while the Dow Jones industrial average was down 1.06 percent.

‘Fear index’ spikes as investors unload European stocks
Eric Reguly – The Globe and Mail
Wall Street’s volatility index, known as the “fear index,” or Vix, spiked to its highest level since the height of the euro zone crisis in 2012 as investors took fright, unloaded European equities and piled into sovereign bonds.
The trades were triggered by rising fears that the global economy is slowing down quickly – telegraphed by plunging oil prices – that Ebola could spread at an alarming rate and that the withdrawal of the U.S. Federal Reserve’s quantitative easing program will leave the markets even more vulnerable.

Volatility Happens, No Need to Panic
Dunstan Pria – Fox Business
Global economic slowdown. The Ebola outbreak. ISIS.
Take your pick. Each has been cited individually and collaboratively as drivers of the recent volatility in stock markets that in recent weeks has generated the biggest price swings since 2011. Consider that Wednesday marked the 18th straight day the Dow Jones Industrial Average swung more than 100 points from its session high to the session low.
Tuesday marked the third straight late-day rout in which markets attempted for much of the day to push higher only to succumb to the pressure of relentless Ebola headlines and less-than-stellar third-quarter earnings reports.

World Economy Gives Investors Growth Scare as They Look to U.S.
Simon Kennedy and Andrew Mayeda – BloombergBusinessweek
The global economy faces its biggest test of confidence since the European sovereign debt crisis as investors fear it’s running out of engines.
Japan and the euro area are throwing up fresh signs of weakness by the day and emerging markets such as China are dragging instead of driving growth. The sense of tumult is being exacerbated by war in the Middle East, the standoff in Ukraine, street protests in Hong Kong and the spread of Ebola to Dallas.

Volatility indices gain, nearly $1.8 tn of m-cap wiped out in last 5 days
Ashutosh Shyam – The Economic Times
The volatility indices of developed markets, a key gauge to measure risk among investors, are finally coming out of their complacency after remaining in hibernation for almost a year. The CBOE VIX index, widely known as the fear index, has advanced as much as 47% since the beginning of October, and is now trading at the level of 24.8, the highest since July 2012. It derives its value from the prices paid for options on the S&P 500 index.
Volatility indices in other markets such as Germany, Britain and Hong Kong have scaled up by as much as 30-40% during the past one month. Volatility indices are gaining as investors are pricing in the direction of the US Federal Reserve policy amid weakening global growth.

The Market is Getting ‘Sentimental’
Bob Lang – CBOE Options Hub
One of the ways for us to understand the emotional state of the markets is to look at sentiment.  The spectrum of fear and greed is wide and when tallying up all the different indicators from VIX, to put/call ratio to polls and money flows we generally wind up near the middle.  At least that true in the long term, but in the short term we see anxiety, stress, worry and uncertainty in these very tools.  The recent rise in volatility is not hard to pinpoint in terms or rationale, there are many worries out there that are on the front burner and so many uncertainties – Ebola virus being just one of them (seems as if something new and scary comes out each day – how is that for uncertainty?).

Currency trading volumes surge to record high in September -CLS
Average daily volumes in the global foreign exchange market hit a record high in September, data from FX settlement system CLS showed on Tuesday, confirming signs of a pickup on the industry’s biggest trading platforms.
The value of all transactions through the CLS system, which is used almost universally by the banking industry to process or settle trades, rose to $5.94 trillion a day last month, around a trillion higher on the month and in comparison to September a year ago.

Market Volatility Bumps Investors as The Fed Prepares to Grind the Market’s Gears
The S&P 500 Index has been making investors woozy with its up-and-down contortions over the last week. This volatility is due to the much-anticipated upcoming Fed decision to take away the proverbial punchbowl, by ending “tapering,” according to Kieran Osborne, portfolio manager at Mission Wealth. While volatility has increased across equity markets after reaching a low-point midway through the year, it appears to be a reversion to historically normal levels of risk. This has been a period of abnormally low volatility in the last few years, brought about by the Federal Reserve’s (Fed’s) “greasing” of the market’s gears, in the form of quantitative easing (QE). With the Fed expected to end QE, the market may grind a little more going forward.

Oil Wreaking Havoc on Small-Cap Energy Stocks Sliding 36%
Joseph Ciolli and Oliver Renick – Bloomberg
Owning almost anything in the U.S. stock market has been a losing proposition since September. Owning smaller energy companies has been a catastrophe.
Hercules Offshore Inc. and Resolute Energy Corp. (REN) are among 19 oil-and-gas equities in the Russell 2000 Index that lost more than half their market value over six weeks. Plunging oil prices fueled losses after production jumped and the dollar strengthened, dragging the Russell energy sub-index down 36 percent since the end of August.

The Re-Emergence of Perma Bears
Adam Warner – Schaeffer’s Investment Research
One of the features of big market drops is that you get all the Macro-Perma Bears back on the TeeVee — such as this one from CNBC.


ISE and KCG Jointly Enhance Execution Capability for Multi-Legged Options Strategy Orders with Stock Component
Press Release – ISE
ISE today announced that KCG, an independent execution-only trading firm, has enhanced its execution capabilities for the stock component of multi-legged options strategy orders. These enhanced execution capabilities access liquidity directly from the equities exchanges, whereas previously, orders were sent only to alternative execution destinations, such as dark pools. As a result of this enhancement, fill rates for multi-legged options orders that include stock have increased.  

ICE Futures Europe Announces Record Daily Volume in Low Sulphur Gasoil Related Contracts
Press Release – ICE
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, announced today that ICE Futures Europe reached a daily volume record in trade for ICE Low Sulphur Gasoil futures. A new total daily volume record for ICE Low Sulphur Gasoil futures across ‘G’ and ‘ULS’ code contracts was set on Tuesday, October 14, 2014 with 67,110 contracts traded. The previous total daily volume record of 38,346 contracts was established Monday, October 13, 2014.
The two ICE Low Sulphur specification Gasoil futures contracts now represent approximately one third of total open interest for Gasoil Futures at ICE Futures Europe, with an open interest of 157,132 contracts as of today.
In May of this year, after an extensive market consultation, ICE Futures Europe announced that the Exchange would automatically extend the G contract beyond January 2015. The specification change of the G contract to 10ppm Low Sulphur Gasoil content, would take effect from the February 2015 contract month; and open interest in the existing Low Sulphur Gasoil futures (ULS) beyond February 2015 would also automatically transition of to the new G equivalent contracts on the effective date.

(Via email)
SPX Options Volume at CBOE Reaches New All-Time High
VIX Futures at CFE Sets New Single-Day Record
C2 Options Exchange Experiences Busiest Day in History
CHICAGO, IL — October 15, 2014 — CBOE Holdings, Inc. (NASDAQ: CBOE) today announced that trading volume in S&P 500 Index (SPX) options and CBOE Volatility Index (VIX) futures set new single-day records, while C2 Options Exchange (C2) experienced the busiest trading day in its history on Wednesday, October 15.


How To React To A Market Crash
William Baldwin – Forbes
The scaremongers are out again. I’m very fretful about the damage they could do to your net worth.
Since anxiety is built into our amygdalas, we can’t displace it entirely. But we can learn to redirect it. Let’s look at three investor fears propagated by various doomsayers and see how to divert those fears into useful behavior.
The high-frequency hype. Michael Lewis made a bestseller out of the theory that rapid-fire traders using well-placed computers are sucking the life out of the stock market, leaving nothing for the little guy.

Time For A ‘Texas Hedge’?
Peter F. Way – Seeking Alpha
They’re not stocks, they are ETFs, exchange traded funds. ProShares Ultra VIX Short-term Futures (NYSEARCA:UVXY) is a leveraged ETF, constructed in a way designed to have its price move twice as far (in %), day by day, as the VIX Index. Pro Shares Short VIX Short-Term Futures (NYSEARCA:SVXY) is UVXY’s evil twin, which moves in the opposite direction as the VIX index. These things are volatile, real price movers. Not investments for the rent money.


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