Observations and Insights
EDITOR’S NOTE: We are pleased to have Henry Schwartz, President of Trade Alert and a JLN Options sponsor, as guest editor of JLN Options all this week. We are looking forward to his opinions and insights.
Technology and Volume – A Brief History
Henry Schwartz – President, Trade Alert
I want to thank everyone involved for giving me the chance to guest edit the John Lothian Options Newsletter this week. I’m continually amazed by the quality, quantity, and most importantly the relevance of the content produced by the JLN team and I find this newsletter to be a true time-saver in the quest for intelligence amid the fragmented mass of news out there- a quest very much in-line with how my firm handles option data for option professionals from Wall Street to South LaSalle Street (nice segue huh?)
I’ve been involved in listed options for a full 25 years now and I’ve spent plenty of time on trading floors, trading desks and, more recently, inside data-center cages. Even those ‘newbies’ who recently entered our markets have seen significant change, with clear consequences to those who fail to adapt as our markets evolve.
Read More >>> http://jlne.ws/1kwx4LM
+ + + + +
Monster Volumes: Jon Najarian Says Weeklys Are Powering Options Volumes
US options volume reached its second highest level in 2013 but can it continue to grow in 2014?
Jon Najarian, co-founder of OptionMONSTER said the key drivers for the options industry are: weekly options, a strong economic recovery and continued demand for more options education. “The two biggest things driving volumes in options, or at least holding them, are weekly options,” said Najarian, who is also a regular contributor on the markets for CNBC. “As we get more weekly options, there is more turnover because of course they are an expiring option and you’re in an expiring option every single week. They are extremely popular because they let you drill down into the dates you want.”
VIX Traders Pile Into S&P 500 Rebound Bets as Puts Jump: Options
Nikolaj Gammeltoft and Callie Bost – BloombergBusinessweek
Traders are making unprecedented use of the options market to bet on a rebound in U.S. stocks.
Ownership of puts on the Chicago Board Options Exchange Volatility Index reached a record 3.2 million on Feb. 6, according to data compiled by Bloomberg. Money poured into the bets against the VIX (VIX) after the gauge, used by investors as insurance against share losses because it rises when equities fall, climbed to a 13-month high of 21.44 last week before collapsing to 15.29 by Feb. 7.
**A few years ago at the CBOE Risk conference a top analyst hinted that he liked long 30 to 45 day VIX puts to play the contango term structure with limited risk. Owning puts as futures decay is almost like getting long-theta from a long option. -HS
Birinyi Sees S&P 500 at 1,900 by July as Shorts Miss 6% Drop
Nick Taborek and Callie Bost – BloombergBusinessweek
U.S. stocks have too much momentum to make betting against the Standard & Poor’s 500 Index a winning strategy and the gauge will probably reach 1,900 next quarter, according to money manager Laszlo Birinyi.
Known Unknowns: preparing for SEF-traded FX options
“With respect to transactions involving swaps subject to the clearing requirement … counterparties shall … execute the transaction on a board of trade designated as a contract market … or execute the transaction on a swap execution facility.”
With these words, the Dodd-Frank Act launched a new acronym into the alphabet soup of modern capital markets. In the years since, Swap Execution Facilities have been the subject of repeated discussions, consultations, submissions and interpretations, writes Robert Gray.
Get used to market volatility
Jesse Solomon – CNNMoney
Big swings in the market have been a common theme already this year.
The CBOE Volatility Index, or VIX, is up nearly 15% so far in 2014. And CNNMoney’s Fear and Greed Index, which tracks the VIX and six other gauges of investor sentiment, has been in Extreme Fear mode for more than a week. It may stay like this for a while.
VIX Futures Market Speculators: Trimmed Bearish Positions
Zachary Storella – Investing.com
VIX Futures Contracts: Large trader and speculator positions trimmed their bearish bets from the previous week in the VIX futures market last week, according to the latest data from the Commodity Futures Trading Commission (CFTC) released on Friday.
Vol Sinks, Could Go Lower
Andrew Giovinazzi – The Options Insider
Don’t miss our webinar in March- How to sell puts in an ugly market.
There is little doubt that stocks are a different beast at the start of 2014. As we look at the VIX tank from Friday, the index is getting to the magic number of 16%. That is a 1% move per day for the big SPX index. For 2013 the 360 day average realized volatility, take a guess, was 11.6%. The 10 day HV right now is almost 20%. Stocks have been smoking, mostly in the down direction.
Volatility Pop … and Drop
Adam Warner – Schaeffer’s Investment Research
Well, volatility has sure gotten … volatile … lately.
The CBOE Volatility Index (INDEXCBOE:VIX) closed at 21.44 on Monday, marking the highest close since late December 2012. It hadn’t ceded much by Wednesday, as it had dropped just to 19.95. What followed, of course, was a big two-day rally in the market and a sizable plunge in VIX, taking it down to Friday’s close of 15.29.
** Vol of vol is a hot topic among traders and one reason many vol-focused funds had mediocre returns last year. Recent realized vol in Vix spot is near 160%. -HS
Volatility specialist launches discretionary business
Arcanum Asset Management is launching a discretionary investment management business.
The firm, which specialises in options trading, has received permission to run client money on a discretionary basis under what the FCA terms the ‘Variation of Permissions’.
Emerging Stocks Decline as Forint Sinks on Goldman’s Call
Elena Popina, Maria Levitov and Ian Sayson – Bloomberg
Emerging-market stocks fell for the first time in three days as OAO Sberbank led losses in lenders. The forint sank after Goldman Sachs Group Inc. said further rate cuts will make Hungary vulnerable amid a rout in riskier assets.
Futures Algorithms Expected to Soar: Tabb Group
Phil Albinus – Traders Magazine
The market research firm predicts that US buysides trading futures via sophisticated formulas will grow 96 percent from 2011 to 2015.
** Plenty of smart option traders drawn to futures markets by a lower technology spend, easier regulators, and better leverage.
Cross-border swaps cohesion speeds up with trade talks
Richard Henderson – The Trade
Greater coordination between Europe and the US on key OTC derivatives reforms may occur faster if included in trade talks, as platform operators and sell-side firms seek new ways to serve clients in different jurisdictions under current rules.
Videocast: Sellers lead VIX trade
FCStone brokerage boss quits amid stress from regulations -CEO
Tom Polansek – Reuters
The head of INTL FCStone Inc’s futures brokerage has resigned because the stress from new regulations and difficult market conditions became too intense, the chief executive of the broker’s parent company said on Thursday.
‘Done-Away’ Order Management Launches in PrecISE Trade
The International Securities Exchange Holdings, Inc. (ISE Holdings) today announced the launch of ‘done-away’ order management in PrecISE Trade, ISE and ISE Gemini’s front-end order and execution management system. ‘Done-away’ order management provides ISE and ISE Gemini members with fully consolidated order and execution management, regardless of execution method or destination. This enhancement is the latest addition to PrecISE Trade’s suite of OMS features, which are available to all PrecISE users at no additional cost.
** Exchanges are working very hard to make their front-end the only front-end a trader needs, and the price is right! -HS
IntercontinentalExchange Earnings Preview: Derivatives Trading And Technology In Focus
IntercontinentalExchange Group (NYSE:ICE) is scheduled to announce its fourth quarter results on February 11. This will be the first set of quarterly results that the company will release after completing the acquisition of NYSE Euronext. The predominant trend across the industry during 2013 was a sustained surge in derivative trading volumes versus a decline in equity trading, which is also reflected in ICE’s figures for the year.  The falling volumes of cash-traded products can be attributed to a maturing equities market, whereas high-margin derivatives trading is on the rise.
DirectEdge Recovers after Early Messaging Snafu
John D’Antona Jr. – Traders Magazine
BATS Global Market’s Direct Edge EDGX Exchange has recovered Monday morning following an earlier reported messaging glitch.
U.S. exchanges battle over SIP data system
Bradley Hope – MarketWatch
U.S. exchanges are at loggerheads over the maintenance of a critical piece of market infrastructure.
At the heart of the dispute is a Securities Information Processor, or SIP, a system that consolidates quote and trade data for U.S. stocks.
Regulation and Enforcement
S.E.C.’s Losing Streak in Court Puts Agency in Spotlight
Peter J. Henning – The New York Times
Every litigator says that trials are messy affairs because no one can predict how they will play out. After a string of recent unfavorable verdicts in fraud cases, the Securities and Exchange Commission may, too, be concerned with that trend.
Blythe Masters Was Just What Regulators Needed
Paula Dwyer – Bloomberg
Should the fox guard the henhouse? The U.S. has a history of regulating that way. The most prominent case was Franklin Roosevelt’s 1934 appointment of Joseph Kennedy, a notorious stock-market manipulator, to lead a brand new Securities and Exchange Commission. Why Kennedy? “Takes one to catch one,” Roosevelt said at the time.
EU rules to light up derivatives markets set for shaky start
Huw Jones – Reuters
New rules coming into force in Europe this week to shine more light on the $700 trillion derivatives markets will take years to produce a clearer picture of these complex products which were at the heart of the financial crisis.
Top Regulator Calls for Review of How Markets Operate
Scott Patterson – The Wall Street Journal
A top market overseer called for a sweeping review of computer-driven securities markets Thursday, saying regulators should focus on “points of failure” such as computerized links between stock exchanges and so-called mini-flash crashes in stocks.
Dreyfus to pay $4.1 mln fine in U.S. market manipulation settlement
Louis Dreyfus Energy Services LP on Friday agreed to pay a civil penalty of $4.1 million and disgorge another $3.3 million plus interest to settle U.S. allegations of power market manipulation.
At the cutting edge of exchange technology
Anna Irrera and Anish Puaar – Financial News
For modern stock exchange groups a strategic focus on technology is essential. Over the past decade, global financial markets have grown in complexity, with many firms now relying on speed to make money from trading.
**The securities part of a stock exchange is the easy part. It’s all about technology now, which is why we see exchange organizations leveraging their tech with multiple exchange models. – HS
OptionsCity Expands Global Hosting Solution in London; Selects Interxion
Press Release (OptionsCity)
OptionsCity, a leading provider of services, tools including pricing, risk management, execution and automated systems, today announced that it has selected Interxion to support the company’s expanding global hosting infrastructure by leveraging its European cloud- and carrier-neutral colocation data center services. OptionsCity’s offering in London marks the fourth component of its global solution, alongside previously launched facilities in New York, Chicago, Aurora, and Frankfurt.
Where to Profit From Volatility
Theresa W. Carey – Barron’s
Options traders are a key market for most online brokers, primarily because they are much more active than investors who focus on a few stocks and some mutual funds. So it’s no surprise that analytical platforms for options traders have proliferated over time.
Hedging your bets: Long/short strategies for a souped-up market
Barry Glassman – CNBC
2013 was an incredible year for the stock market. In fact, for the past two years, stocks have been on an unbelievably good run. Which begs the question: What should you do to hedge your bets?
Options Traders: Watch Out For This Little-Known Income Killer
Using a covered call strategy can be a great way to generate steady returns in your portfolio. As a general rule, I expect my covered call trades to increase my capital by about 25% to 35% per year, depending on the market environment.