JLN Options: More volatility expected as Fed rate rise looms – Cumberland Advisors’ David Kotok; The Options Industry Council Announces September Options Trading Volume Increased 16 Percent; Russell 2000 Poised for Correction as Small Stocks Tumble

Oct 1, 2014

Observations and Insight

Is Eighth Time the Charm for Volatility?
Sarah Rudolph, John Lothian News

After a summertime slump, volatility has jumped back up again. In his market commentary on Friday, Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, noted a pullback in the SPX and continued elevated levels of volatility, and said recent patterns suggested that if the SPX dropped to 1950 it was likely to rebound to another record high.

Expanding on his comments in a telephone conversation with JLN Options, Frederick said recent pullbacks in the S&P 500 Index (“SPX”) and spikes in the VIX were not huge by historical standards, but are significant spikes when compared to the last few months.

“I often say the VIX is good at predicting the next five minutes or the next couple of months – in other words, either very short or very long term,” Frederick said. “When the VIX is on the rise, it could mean there is a pending event in the future that people are concerned about.”

The expected events in this case are the end of the Federal Reserve’s tapering process on Oct. 30, and the midterm elections on Nov. 4.

“Those two things occurring within a week are pretty significant,” he said. “The difficult part for me is knowing whether this current pullback and slight increase in volatility is tied to those events, or does it have more to do with what’s going on in Hong Kong, Ukraine, and other political issues?”

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Lead Stories

More volatility expected as Fed rate rise looms – Cumberland Advisors’ David Kotok
By Jeanine Prezioso, Reuters
A healthy dose of fear has re-entered financial markets in the final three months of the year. The Chicago Board Options Exchange VIX, a widely tracked measure of market volatility, rose to a two-month high on Wednesday.
Varying news reports offered threats from the Ebola virus and a stagnating European economy as tangential reasons. Perhaps another point is many investors view the U.S. Federal Reserve’s pending decision to raise interest rates as a rumbling train far off in the distance that they now hear headed their way. Closer to the horizon are headlines that can no longer lean on “Fed easing” to explain away rising asset prices and a rising stock market.

The Options Industry Council Announces September Options Trading Volume Increased 16 Percent
Chicago, IL — October 1, 2014
The Options Industry Council (OIC) announced today that 365,917,341 contracts were traded in September, a 15.83 percent increase compared to the 315,911,302 contracts traded in September of last year.
Average daily volume for the month was 17,424,636 contracts, 10.31 percent more than last September’s 15,795,565 contracts. Trading volume for the first three quarters of 2014 stood at 3,124,596,298 contracts, up 1.62 percent compared to the 3,074,874,727 contracts traded in the same period last year.

Trading Activity Rises 16% at Options Industry Council in September
A recent splurge of volatility in global markets paved the way for stronger then expected trading activity at global exchanges. The Options Industry Council reported a sixteen percent growth in trading volumes YoY.

Russell 2000 Poised for Correction as Small Stocks Tumble
By Callie Bost and Lu Wang, Bloomberg
The Russell 2000 Index plunged, poised for a correction, as investors sold speculative shares amid concern over economic growth in Europe and geopolitical turmoil as the Federal Reserve prepares to end its bond-buying program.
The Russell 2000 lost 1.3 percent to 1,087.23 at 1:33 p.m. in New York, 10 percent below a record reached in March. If the index closes at that level, it would meet the common definition of a correction.

Oil options traders dash for lower puts as crude oil slumps
(Reuters) – Oil options traders rushed to protect themselves against a deeper slump in global crude oil on Tuesday, buying thousands of contracts that propelled the volatility index toward the highest level in nearly a year.

OCC Announces Cleared Contract Volume in September Increased 15%
CHICAGO (October 1, 2014) – OCC announced today that total cleared contract volume in September reached 371,034,038 contracts, a 15 percent increase from the September 2013 volume of 321,604,328 contracts.  OCC’s average daily cleared volume for the month was 17,668,288 contracts, a 10 percent increase from September 2013. OCC’s year-to-date total cleared contract volume is up 2 percent in the first three quarters of 2014 with 3,174,169,243 contracts.

Stock Traders Buy High Volume of McDonald’s Co. Put Options (MCD)
Posted by Nolan Pearson, WKRB News  
McDonald’s Co. logoMcDonald’s Co. (NYSE:MCD) was the recipient of unusually large options trading activity on Tuesday. Stock traders acquired 21,573 put options on the stock, AnalystRatingsNetwork.com reports. This is an increase of approximately 143% compared to the average volume of 8,868 put options.

Rising dollar index may have a silver lining for India; Value of greenback hits a 4-year high
By Ramkrishna Kashelkar, The Economic Times (India)
The expectations of an increase in interest rate have added muscle to the US dollar, and some experts feel that it could move even higher in coming months. On the other hand, India has started seeing a steady exit of FII money in the past 10 trading sessions, and consequent weakness in the equities market.
The very low level of volatility index, or India VIX, indicates that markets had turned complacent, said Gaurav Mehta, equity strategist, Ambit Capital. “This means even a small negative news can trigger a bigger correction,” he explained.

US STOCKS-Wall St dips; VIX level suggests market may be oversold
By Ryan Vlastelica, Reuters
U.S. stocks fell on Wednesday, with investors spooked by the first diagnosis of Ebola in a patient in the United States, but the CBOE Volatility index pared back from earlier gains, suggesting further volatility may be limited.

Investors are scared out of their wits
By Paul R. La Monica, CNN Money
This isn’t September 2008. No Wall Street firms are in danger of going belly up.
The market hasn’t just suffered a Flash Crash like in May 2010.
Heck, it’s not even August 2011 — when investors were rattled by the credit rating downgrade of the United States by Standard & Poor’s.  
But investors are acting as if they just saw the famous shower scene in Alfred Hitchcock’s “Psycho.”


Intercontinental Exchange Completes First Phase of the Liffe Transition to ICE Futures Europe; London Soft Commodities Now on the ICE Platform alongside ICE Futures U.S. Softs Contracts
October 1, 2014
LONDON–(BUSINESS WIRE)– Intercontinental Exchange (NYSE:ICE), the leading global network of exchanges and clearing houses, announced that it has successfully completed the transition of the Liffe London soft commodity futures and options contracts to ICE Futures Europe.

Exclusive: BATS eyes Concannon, Marques for exchange president
By John McCrank and Herbert Lash, Reuters
BATS Global Markets has narrowed its search for a new president to two industry executives with close ties to the No. 2 U.S. stock market operator, three sources familiar with the situation said on Wednesday.
Chris Concannon, president and chief operating officer of trading firm Virtu Financial, and Jose Marques, global head of electronic trading at Deutsche Bank, are the front-runners for the position, the sources said. Neither candidate, however, is guaranteed to take the job and others remain in the mix, one of the sources said.

CME Group Inc. Announces Date of Third-Quarter 2014 Earnings Release, Conference Call
CHICAGO, Sept. 30, 2014 /PRNewswire/ — CME Group Inc. will announce earnings for the third quarter of 2014 before the markets open on Thursday, October 30, 2014.  The company has scheduled an investor conference call that day at 7:30 a.m. Central time.

CME faces questions over pending swaptions service
Tom Osborn, Risk magazine
The interest rate swaptions market – bifurcated and largely illiquid – will not be easy to drag into clearing houses, although the benefits could be huge. CME Group hopes to launch a service, but dealers are viewing it with caution
They are tried and tested products, with a broad, loyal user-base, but when it comes to clearing, interest rate swaptions have so many quirks that one dealer describes them as “toxic waste”. Buy-side demand focuses on European-style swaptions, leaving dealers structurally short on that portion of the market. In turn, dealers balance their portfolios using Bermudan-style or mid-curve swaptions, yield curve spread options and constant maturity swaps.

CBOE Holdings Reports September 2014 Trading Volume
– ADV Up 9% from September 2013, 10% from August
– Best Quarter Ever for VIX Futures Trading Volume
CHICAGO, Oct. 1, 2014 /PRNewswire/ — CBOE Holdings, Inc. (NASDAQ: CBOE) reported today that September 2014 trading volume for options contracts on Chicago Board Options Exchange® (CBOE®) and C2 Options ExchangeSM (C2SM) and futures contracts on CBOE Futures ExchangeSM (CFE®) totaled 108.94 million contracts. Average daily volume (ADV) was 5.19 million contracts, a nine-percent increase from September 2013 and a ten-percent increase from August 2014.

CBOE Futures Exchange Reports September 2014 Trading Volume
(press release via email)
– VIX Futures Volume Increases 27% Over Year Ago
– Trading Activity During Third Quarter Sets Records
– Extended Trading Hours Accounts for Nearly 9% of Total Volume
CHICAGO, Oct. 1, 2014 /PRNewswire/ — CBOE Futures Exchange, LLC (CFE®) today reported that September 2014 average daily volume (ADV) and total trading volume, both exchange-wide at CFE and for futures on the CBOE Volatility Index® (VIX® Index), rose over year-ago levels, while the third quarter of 2014 experienced record trading activity.  

Wild Ride Continues at Moscow Exchange, FX Volumes Up 10% in September
The Russian multi asset venue explained that the growth in derivatives trading figures was mainly driven by increased volumes in FX futures, which were up 118.5% YoY in September 2014 to RUB 2.7 trillion.
The Moscow Exchange (MOEX) has just released its September 2014 trading volumes showing a strong increase in overall derivatives numbers compared to the same month of the previous year. The FX market trading volume rose again at MOEX during the month of September, after dropping 15% in August and rising 15% in July.


Strong Long-Term Performance for CBOE’s BXY and PUT Indexes
By Matt Moran, CBOE Options Hub
Can index-option-writing strategies have relatively strong performance even when the VIX has dipped below the 16 level?  As shown in charts below, over the past quarter-century both CBOE S&P 500 PutWrite Index (PUT) and CBOE S&P 500 2% OTM Buy-Write Index (BXY) have had relatively strong returns and lower volatility when compared to some key “traditional” benchmark indexes.

How to Invest in eBay as PayPal Spinoff Nears
The shares are likely to be stuck in a tight range, making it a good candidate for this options strategy.
Steven M. Sears, Barron’s
It’s time to sell puts on eBay.
News of the PayPal spinoff anticipated in 2015 should keep eBay’s (ticker: EBAY ) stock from rising or falling very far. This makes options sales a good strategy.
The trade should work until the middle of next year when eBay is expected to divide into two companies. One company will represent eBay’s auction business; the other will represent the PayPal electronic payments business.

AUDUSD: Bullish Chart Pattern
By GOptionForex, Investing.com
Today’s Binary Options Trading Strategy:
• Currency Pair: AUD/USD
• Timeframe: H4 (Hourly Chart)
• Binary Option Trading Recommendation: Seek binary call options on dips below 0.8680
• Upside Potential: The upside potential for this binary call option is 360 pips to 0.9140
• Downside Potential: The downside potential for this binary call option is 120 pips to 0.8560

Commit To Purchase Buffalo Wild Wings At $100, Earn 5.9% Using Options
Investors eyeing a purchase of Buffalo Wild Wings BWLD -1.7% Inc (NASD: BWLD) shares, but tentative about paying the going market price of $134.10/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the January 2016 put at the $100 strike, which has a bid at the time of this writing of $5.90. Collecting that bid as the premium represents a 5.9% return against the $100 commitment, or a 4.6% annualized rate of return (at Stock Options Channel we call this the YieldBoost).

Is the OCC the Next Big IPO?
by Adam Warner
Steven Sears takes on an interesting topic in The Striking Price column (subscription required) this week: Should the OCC go public?
At a time when almost everything on Wall Street is valued and traded, Options Clearing Corp. remains an exception. The OCC, which issues and settles all U.S. options contracts, is a true monopoly that remains privately owned. Intercontinental Exchange (ICE), CBOE Holdings (CBOE) Nasdaq OMX Group (NDAQ), and the International Securities Exchange unit of Deutsche Borse (DB1.Germany) are the owners.
In years past, the OCC has been discussed as an initial-public-offering candidate. The OCC says it has no plans for a stock offering, but how to maximize the organization’s value is a topic worth revisiting.
My opinion? Noooooooo!

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