JLN Options: VIX July Gain Tops 8% as Ukraine Jolts Record S&P 500; Top Forex Tweeter Branching Out as Volatility Bites; A mixed quarter for bets on U.S. stock volatility

Jul 29, 2014

Lead Stories

VIX July Gain Tops 8% as Ukraine Jolts Record S&P 500
Callie Bost – Bloomberg
Signs of anxiety are returning to the U.S. stock market as it hovers near an all-time high.
The Chicago Board Options Exchange’s Volatility Index has risen 8.6 percent in July to 12.56, poised for the biggest monthly advance since January. That’s led traders to add almost $200 million to the largest exchange-traded fund linked to market swings, data compiled by Bloomberg show.

Top Forex Tweeter Branching Out as Volatility Bites
Lucy Meakin and Todd White – Bloomberg
When it comes to building influence in foreign-exchange markets, institutions from CME Group Inc. to the International Monetary Fund can take a lesson from a Barcelona-based website with a staff of 50.
FXStreet News is ranked top worldwide among Twitter Inc. users of currency-market analysis, according to data compiled by Bloomberg based on followers, retweets and frequency of posts being tagged as a “favorite.” The website publisher of in-house and outside research on foreign exchange is run by Francesc Riverola and Miriam Pinatell, the husband-and-wife team that founded it in 2000 with web developer Sergi Fernandez.

A mixed quarter for bets on U.S. stock volatility
Ryan Vlastelica – Reuters
With some of Wall Street’s more volatile names set to report in the next couple of days, traders who bet on big swings in shares are hoping to see moves more like Facebook than Netflix.
Netflix, along with Gilead Sciences (GILD.O) and several other stocks famous for their sharp gyrations, were unusually calm following their latest quarterly reports. However, Amazon.com and Facebook have had big days after their reports, heightening expectations for upcoming releases from Tesla Motors Inc (TSLA.O) and Expedia Inc (EXPE.O).

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Currency Markets Still Waiting
Marc Chandler – Investing.com
Looking at the volatility implied by the options market exaggerates the low actual volatility. Consider, for example, that the options market implies 4.5% euro-dollar volatility (one-month). The actual volatility is 3.1%. This is, of course, more than the term structure or the vol smile can justify. It partly reflects fear that volatility may rise sharply. It may also partly reflect dealers reluctance to take on the risks and costs without getting compensated.

Videocast: Volume falls in VIX pits

Zero Hedge and Bond Volatility
Russell Rhoads – CBOE Options Hub
There are two things that most financial markets professionals have in common. First, we all read Zero Hedge. Second, we don’t admit we read Zero Hedge. Before people get upset, the second part is a joke. This morning as I got settled in at The Options Institute I came across a tweet from Zero Hedge showing a disconnect between the 10 Year Yield and the S&P 500.

The Guacamole Dilemma: Dip Buyers Must Be Aware of Too Much Dip
Bob Lang – CBOE Options Hub
So, when the markets drop 2-3%, which we have seen can happen within a week’s time – then is it right to buy that dip?  If you look at the chart below dating back a year the answer is a resounding YES.  But we are talking about drops/corrections in price and not time.  What makes many uncomfortable are the sharp drops in a few days that used to take a few weeks to occur.  We could blame that increase of speed on any ol’ reason – algorithmic traders, high frequency trading, hedgers, ETF’s, or just a more informed and reactionary investor/trader.  Gone are the days of buy and hold, which often turns into hope and pray mode!

Fun With Numbers: The Billy Beane Edition
Adam Warner – Schaeffer’s Investment Research
The now not-so-new FiveThirtyEight.com came to life with all sorts of buzz … especially for those of us in the numbers geek world. It even coined a meta-phrase for a concept that’s been around for a while … Data Journalism! Hey, we do data journalism here! I mean we run CBOE Volatility Index (VIX) data all the time and it turns into something resembling journalism, right?
Dirty little secret, though. You can often use data to tell the story you want to tell.


Nasdaq CEO says maker-taker model has value, but fees too high
Sarah N. Lynch – Reuters
Nasdaq OMX’s chief urged U.S. regulators on Monday to re-examine the pricing model that stock exchanges use to attract trading, joining the debate about a fee-based incentive for traders that has come under scrutiny in recent months.
Robert Greifeld called for a re-evaluation of the “maker-taker” model, in which exchanges pay rebates to traders who bring liquidity to the market and charge fees to those who take it away.

ICE pushes ahead with NYSE reforms
Rob Daly – The Trade
In less than a year since acquiring NYSE Euronext, Intercontinental Exchange has (ICE) spun-off Euronext and took it public, integrated the various LIFFE businesses into ICE’s future markets and began selling off NYSE Technologies’ assets to third-party vendors.
This has left some on The Street wondering what is next for the New York Stock Exchange (NYSE).
Yet, these changes should come as no surprise to anyone, according to David Weiss, a senior analyst at industry research firm Aite Group.

Regulation and Enforcement

U.S. regulators looking into UBS, Deutsche Bank speed trading operations
Jonathan Gould, Katharina Bart and Joshua Franklin – Reuters
Germany’s Deutsche Bank and Switzerland’s UBS said they were caught up in an inquiry by U.S. regulators, who are looking into whether broker-run stock exchanges gave an unfair advantage to high-frequency traders.
The investment banks, which said on Tuesday that they were cooperating with inquiries, also faced class action suits that alleged they violated U.S. securities laws, allowing high-speed traders to make a profit at the expense of institutional investors, such as pension funds and insurance companies.

U.S. CFTC penalizes JPMorgan unit over inaccurate trader reports
Aruna Viswanatha – Reuters
A JPMorgan Chase & Co unit will pay $650,000 to resolve charges that it submitted inaccurate reports about the positions held by some of its large trader clients, the U.S. commodities regulator said on Tuesday.

Secret Irish Derivatives Stay Hidden After Bank Crisis
Joe Brennan and Donal Griffin – BloombergBusinessweek
Six years ago, an obscure financial instrument hastened the demise of Anglo Irish Bank Corp., the lender which helped drive Ireland into an international bailout. Today, those instruments remain in the shadows.
Two of the bank’s former directors this week face sentencing after being convicted of a loans-for-shares scheme aimed at stopping a secret stake in the lender flooding on to the market in 2008. The family of Ireland’s then richest man had clandestinely built the 28 percent stake, using derivatives known as contracts for difference, or CFDs.


3 Protection Strategies for Nervous Investors
Gregg S. Fisher – Barron’s
Volatility is back in the markets. On July 17, following the Malaysia Airlines disaster in Ukraine and the Israeli land invasion of the Gaza Strip, the Volatility Index (VIX) of implied S&P 500 Index volatility surged 32.2% in one day, to 14.54. This and the long bull market the U.S. has experienced since 2009 have caused many investors to regain interest in forms of downside protection for their stock portfolios. In this column, I’ll discuss three downside protection strategies for nervous investors —options, variable annuities and asset allocation—but before that, for context, let’s review some recent market history.

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