Observations & Insight

Ch-ch-ch-changes to our newsletters
We have altered our JLN newsletter properties. Now, JLN Financials, Managed Futures and Environmental Energy are integrated into the flagship morning newsletter. If you had a subscription to any of those three newsletters, you are now receiving the morning newsletter instead (unless, of course, you already had a subscription to our morning property).

If you do not wish to receive the morning newsletter in lieu of the others, simply use the unsubscribe link at the bottom of the email.

This options newsletter will continue unabated.

For those readers stateside, have a safe and enjoyable Fourth of July weekend! For those in Canada, happy Canada Day.

Due to the holiday we will not be publishing on Monday, but will be back in action on Tuesday.


Let Me Count the Ways: Nasdaq Looks at All the Possibilities for Options, and Beyond, in ISE Acquisition
Jim Kharouf – JLN
With double the number of US equity options exchanges, Nasdaq has some work to do in the coming months. Nasdaq closed the deal today for $1.1 billion with Deutsche Boerse, giving the exchange three options markets: International Securities Exchange, ISE Gemini and ISE Mercury, to go along with Nasdaq Options Markets (NOM), Nasdaq OMX BX and Nasdaq OMX PHLX. Tom Wittman, executive vice president of Nasdaq and global head of equities at Nasdaq, told John Lothian News that the plan is to integrate and migrate the three exchanges onto the Nasdaq platform. That essentially means the technology team at Nasdaq will have to rebuild the ISE exchanges to provide the same functionality and rules that exist today.


People on the Move
By JLN Staff

Molly McGregor, ISE’s head of communications, said goodbye to her colleagues as the sale to Nasdaq closed yesterday and she moved on to a summer leave and a new beginning next fall. We will miss Molly, hopefully only for the summer. She is a talented, class act professional who would be a credit to any organization in our industry.

Kevin L. Murphy, managing director at Citi, announced that he is leaving the firm after 33 years. He said he is now working on a major motion picture and finishing his first novel. This should make the life of Kevin T. Murphy of Barclays less confusing.

And Will Acworth of the FIA updated his LinkedIn profile with the title senior vice president, publications, data and research at FIA. This looks to be part of the post-Mary Ann Burns reshuffling. There is still an active posting for the other half of the Burns equation, the global industry operations & technology job, for which today is the last day to apply.

Lead Stories

VIX Tempest Plays Havoc With Volatility Notes Taking Futures Cue
Joseph Ciolli and Alexander Dzerneyko – Bloomberg
Post-Brexit price swings have roiled exchange-traded products
Inverse ETN fell along with spot VIX on Monday amid turmoil
The market convulsions of the last week have been a lesson in the complexity of volatility markets for investors who bought exchange-traded notes tied to turbulence in equities.

****SD: “They’re embedded options, so each layer you get away from the original product means more variability. There are so many moving parts and hidden fees that ultimately make these products fluky and difficult to trade.” – Steve Sosnick, an equity risk manager at Timber Hill LLC Our Strategy section has another article that expresses Sosnick’s sentiment: Why VXX is a horrible hedge.

Mid-Year Update on Volatility Indexes, and Thirty Years of Price History for Benchmark Indexes
Matt Moran – CBOE Options Hub
Here are mid-year updates on benchmark indexes and volatility indexes at CBOE – (1) Nine CBOE benchmark indexes all have had less volatility than key stock indexes over the last three decades; (2) The highest daily closing values for select volatility indexes so far this year were 28.14 on Feb. 11 for the VIX Index, and 125.13 on June 24 for the VVIX Index. The CBOE/CME FX British Pound Volatility Index (BPVIX) rose prior to the Brexit referendum, and its daily closing values had a big range from 7.72 on January 8, to 29.1 on June 14. (3) On June 24 VIX futures had record trading volume during non-U.S. trading hours (ETH).

****SD: Charts!

First Half of 2016 Confirms a Higher Volatility Regime
Russell Rhoads – CBOE Options Hub
We are already half way done with 2016 and it appears what we thought going into the year is being confirmed by SPX implied volatility. If the Fall of 2015 there was lots of chatter about the equity markets in the US shifting from a low to a high volatility regime. The low volatility regime had been in place for several years and the first signal of a change came back in late August 2015 when VIX topped 50 intraday for the first time since the great financial crisis. I have two favorite charts that give a good long term perspective on VIX and couldn’t decide which one to use so I settled on both.

Brexit Does Not Mean More Market Volatility
A common narrative to global markets is that volatility has massively increased. Market participants like to claim a new regime of increased volatility with each and every new negative macro event. From the fright over Ebola all the way to the stock market selloff this year, market participants have theorized about “heightened volatility.” Now that markets are fully in the throes of Brexit and its attendant risks, the question is whether volatility has truly increased?

European Cities Battle for London’s Finance Crown After Brexit Vote
Max Colchester
Sam Schechner and
William Wilkes – WSJ
European cities are closing in on London’s wounded financial hub. Following the U.K.’s vote to quit the European Union, London’s position as the continent’s premier financial center is under threat, and officials in Paris, Frankfurt and Dublin aren’t wasting time in trying to hasten its downturn.

****SD: Best quote in the story: “Good luck trying to convince U.S. investment bankers to move [to Frankfurt],” said one London-based consultant. No wonder that individual didn’t want quote attribution.


NYSE Explores Next Move to Compete With Speed Bumps
The New York Stock Exchange and its sister markets are exploring the introduction of speed bumps to slow some orders in a bid to compete with IEX Group Inc., the upstart that won regulatory approval in mid-June for its plan to slow the speed of trading, according to the Big Board’s president.

Nasdaq Enhances Equities Options Business with Latest Deal
Yahoo Finance
Nasdaq, Inc. NDAQ recently completed the acquisition of International Securities Exchange (“ISE”) from Deutsche Börse Group. This acquisition will enable Nasdaq to enhance efficiencies for clients, ramp up its technology offering as well as innovate and experiment in the equity options industry. Nasdaq entered into an agreement to purchase ISE on Mar 9, 2016 and planned to pay in cash or debt for the buyout.

Initial figures suggest Brexit trading volume boost
John Bakie – The Trade
Trading volume on Germany’s major exchanges increased in June, though total order book turnover saw a significant dip compared to the same period last year. Deutsche Boerse figures for June showed a total of 23.6 million trades were executed on its Xetra platform in June, up from 22 million last year. It’s unknown whether recent volatility as a result of the UK’s decision to leave the EU could be a factor, but many are expecting increased trading activity off the back of the news.

Eurex, Nasdaq and BME report growth in June
Futures & Options World
The Eurex exchange, Nasdaq and the Spanish exchange have reported strong growth in June, partly due to volatility before and after Britain’s vote to leave the European Union.

****SD: Nasdaq Nordic and Baltic = daily value of derivatives transactions rose 55 percent to more than EUR 3 billion.

Eurex Group – Trading statistics June 2016
Press Release
In June 2016, the international derivatives market Eurex, part of Deutsche Börse Group, recorded an average daily volume of 9.4 million contracts (June 2015: 8.6 million), an increase of around 10 percent. In total, 207.7 million contracts were traded at Eurex in June. On 14 June, daily volume recorded an annual high with more than 17 million contracts.

****SD: Options on Euro STOXX 50 = 38.3 million contracts. Equity options = 18.4 million contracts. Volatility derivatives = 1.9 million contracts.

Bats Global Markets Statement on ISE Form 4 Filing
Press Release
Bats Global Markets, Inc. (Bats: BATS), a leading global operator of exchanges and services for financial markets, provides the following additional information related to the Form 4 filed by International Securities Exchange Holdings, Inc. (ISE).

Options Regulatory Fee Announcement, Effective August 1, 2016
Press Release
Effective Monday, August 1, 2016, pending filing with the SEC, The NASDAQ Options Market LLC (“NOM”) and NASDAQ BX, Inc. (“BX Options”) will amend their current Options Regulatory Fees (“ORF”) to align to the regulatory expense profile of these markets. The NASDAQ PHLX LLC ORF will remain unchanged.

The Spanish Stock Exchange Traded EUR65.8 Bn. In June, Up 36.2% From May – The Number Of Trades Grows 51%
Press Release
The equity trading volume on the Spanish Stock Exchange in June came in at EUR65.8 billion, up 36.2% from May. The trading volume in the first six months of 2016 came in at EUR389.7 billion, down 25% year-on-year.

****SD: Equity options = 2.5 million contracts. IBEX 35 options = 379k contracts, +110 percent from May.

CBOE, C2 and CFE Trading Schedule for the Independence Day Holiday
Press Release
CBOE Holdings, Inc. (NASDAQ: CBOE) today announced the following trading schedule for Chicago Board Options Exchange (CBOE), C2 Options Exchange (C2) and CBOE Futures Exchange (CFE) in observance of the Independence Day holiday.

****SD: Just a reminder.

Independence Day Holiday Schedule for CME / Globex and ICE Exchanges
Inside Futures


Did Brexit Put London’s Fintech Capital Status in Jeopardy?
Traders News
London has been a magnet for technology startups, buoyed by a favorable regulatory environment and proximity to many of the world’s largest financial institutions.


Seven Common Sense Observations on Option Trading
Gary Delany – MoneyShow.com
Advertorial- Although trading options may seem complicated to many investors and traders; Gary Delany, Director of European Marketing and Education at The Options Industry Council, discusses seven observations that he has made while trading options. There is a lot of information available on using options as a hedging or investing tool, but sometimes it’s hard to see the wood for the trees. Here are seven common sense observations on options trading to keep you focused.

Why VXX is a horrible hedge
Thomas H. Kee Jr. – MarketWatch
Last Friday’s market decline and the risks surrounding Brexit have stirred the pot to say the least, but I am noticing a material negative influence on traders that needs to be talked about and then put to rest. The aggressive declines last Friday made certain instruments appear to be extremely lucrative, and anyone who was filtering for the instruments that gained the most last Friday would see VIX-related ETFs like the Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN VXX, at the top of the list.

As Citi Triples Its Dividend, Here’s How to Trade It; The options market is paying investors handsomely for agreeing to buy Citigroup at a lower price.
Steven Sears – Barron’s
Citigroup has finally begun to shed the stigma it earned during the financial crisis. The bank (ticker: C), once thought to be too big to manage, told investors late Wednesday that it had passed the Federal Reserve’s annual “stress test.” Citi announced it would raise its quarterly dividend to 16 cents from 5 cents and the bank is buying back $8.6 billion of its own stock. Investors have reacted favorably to the news, creating an opportunity to sell puts on the stock. The strategy enables investors to position to buy the stock should the price decline. The strategy is suitable for investors who want to build a position, or increase an existing one.

The Best And Worst Performing Assets In June And Q2
Zero Hedge
As DB’s Jim Reid says, June 2016 will always be remembered as the month when the UK voted to leave the EU and it’s fair to say that the overwhelming focus on the referendum dominated price action in markets from start to finish. Risk assets initially tumbled into mid-month as the leave campaign built momentum, however a swing back in favour for the remain campaign saw most major markets wipe out early month losses to go into the vote relatively flat.

****SD: Not options but interesting.

A (Confused) Dollar The New VIX
Seeking Alpha
We think the dollar can give us a clue of underlying risk appetite. Dollar is a safe haven. As it rises it may be a hint for down markets. But currently it is confused and needs watching.

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