JLN Options: Volatility Traders Just Gave Back a Chunk of Their Gains; CBOE Futures Exchange Reports Busiest Day In History On Friday; Fed Gets Hip to the VIX

Aug 4, 2014

Lead Stories

Volatility Traders Just Gave Back a Chunk of Their Gains
Brendan Conway – Barron’s
The market’s most closely watched volatility index may be up 43% in the last month, but making money with that fact is another matter.
With stocks advancing Monday and market Armageddon failing to materialize, exchange-traded products for volatility slumped. One of them, the leveraged ProShares Ultra VIX Short- Term Futures exchange-traded fund (UVXY), triggered a market short-sale restriction this morning. It finished with a loss of more than 9%.
http://jlne.ws/1xYZtwm

CBOE Futures Exchange Reports Busiest Day In History On Friday (NASDAQ:CBOE)
Press Release (CBOE)
The CBOE Futures Exchange, LLCSM (CFE) today announced that new single-day volume records for total trading volume exchange-wide at CFE and for futures on the CBOE Volatility Index (VIX Index) were set on Friday, August 1.
Total volume at CFE on Friday was an estimated 530,794 contracts traded, which surpassed the previous high of 452,139 contracts traded on April 15, 2013.
For VIX futures, an estimated 527,803 contracts traded, including an estimated record of 68,033 contracts during non-U.S. trading hours. Today’s record trading in VIX futures eclipsed the previous record of 449,955 contracts, also set on April 15, 2013.
http://jlne.ws/1snz1fl

Fed Gets Hip to the VIX
Steven M. Sears – Barron’s
The Federal Reserve’s easy-money policies saved the financial system from failing under the weight of the credit crisis. But the hangover of the central bank’s quantitative-easing experiment of historically low interest rates and monthly asset purchases helped create historically high levels in the stock market. Some investors even worry of a postcrisis bubble.
This is apparently not lost on the Federal Reserve. The Fed is now seemingly interested in managing the market, as well as the economy.
http://jlne.ws/1ltzAze

U.S. ETF Inflows of $23 Billion at Risk as VIX Rises 34%
Callie Bost and Joseph Ciolli – BloombergBusinessweek
The five-year rally that has almost tripled the value of the Standard & Poor’s 500 Index keeps pulling in investors even as signs of strain spread.
About $23 billion has flowed in U.S. equity exchange-traded funds in the past two months, according to data compiled by Bloomberg. The SPDR S&P 500 ETF Trust (SPY:US)absorbed (SPY:US) $6.5 billion last week, the most since December, even as the underlying gauge slid 2.7 percent and the Chicago Board Options Exchange Volatility Index (VIX), a measure of market anxiety, surged 34 percent.
http://jlne.ws/1snD3nP

Checking in on Warren Buffett’s Equity Index Put Trade
Russell Rhoads – CBOE Options Hub
While everyone else has been focusing on Berkshire Hathaway’s record quarter and what stocks they seem to like I continue to focus on their derivative position. The short equity index put option position shows up on pages 14 and 15 of the 10-Q that can be downloaded from www.berkshirehathaway.com. The following is a review and then update of a position I have been monitoring for over a year now.
http://jlne.ws/1v3HtVp

Valuation Trepidation – Weekly Market Outlook
Price Headley – CBOE Options Hub
Ouch.  Not that traders didn’t have an inkling the market was overbought and perhaps poised for stumble, but few saw coming the suddenness and size of Thursday’s drubbing.  However it materialized, we have no choice but to at least entertain the possibility that this is the beginning of a much more significant pullback.
We’ll slice and dice the details in a moment.  The first item we need to cross off our to-do list is a closer look at last week’s major economic reports.
http://jlne.ws/1v3HXe8

Stock Market Volatility Spike, IMX And Retail Earnings On Deck
JJ Kinahan – Forbes
When the S&P 500 shed nearly 40 points last Thursday, logging its second largest one-day plunge so far in 2014, the CBOE Volatility Index (VIX) moved north of 17 for the first time since April 15. Trading had been relatively orderly through the second half of July and the heart of a mostly upbeat earnings reporting season. But the unexpected broad-market pullback, stretching to all 10 sectors of the S&P 500, seems to have stoked fears about a potential larger market correction.
That begs the question: Will anxiety spread?
http://jlne.ws/1snCzOx

ETF Chart of the Day: Vicious VIX
Paul Weisbruch – ETF Trends
It makes sense to watch Volatility linked products closely with the VIX closing above $17 heading into last weekend, and trading as high as $17.57 on an intraday basis on Friday on additional global equity concern amongst many.
Going back to the February/March timeframe, every time the VIX has popped into the $17-$18 range it was not for long, typically retreating sharply the next day.
http://jlne.ws/1v3Iehg

The ‘Fear Index’ Vs. The ‘Greed Index
Peter F. Way – Seeking Alpha
The CBOE Volatility Index (VIX) has a long history (back to 1990) of calculating the implied volatility of the S&P 500 Index of stocks, based on the close-to-the-money prices paid for near-expiration options on the S&P 500 Index. The VIX index measures the uncertainty component of the standard formula for pricing options by turning that formula around and taking market prices as an input (instead of solving for them) and instead, solving for an uncertainty amount that would justify the then present options market prices.
http://jlne.ws/1snCJFD

OTC Trade Processing Still Largely Manual
MarketsMedia
With regulations transforming OTC derivatives, operations teams are looking for ways to automate the derivatives lifecycle in order to reduce processing time and dependency on manual systems and spreadsheets, as well as provide transparency into audit trails and ensure accurate reporting to management.
“The workarounds in the OTC space stem from the traditional highly bespoke and customized nature of the trades,” said Björn Schumburg, senior business consultant at SimCorp.
http://jlne.ws/1snw92a

Exchanges

ISE Reports Business Acitvity for July 2014
Press Release (International Securities Exchange)
– ISE and ISE Gemini combined represent 14.8% of equity options market share, excluding dividend trades.
– ISE and ISE Gemini reported a combined ADV of 2.1 million contracts.     
– Dividend trades made up 1.4% of industry volume in July 2014.
The International Securities Exchange Holdings, Inc. (ISE Holdings) today reported a combined average daily volume (ADV) of 2.1 million contracts in July 2014 for its two exchanges, ISE and ISE Gemini. This represents 14.8% of U.S. equity options market share.
http://jlne.ws/1xVRWhT

CME Group Volume Averaged 12.2 Million Contracts per Day in July 2014, Up 13 Percent from July 2013
Press Release (CME Group)
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that July 2014 volume averaged 12.2 million contracts per day, up 13 percent from July 2013.  Total volume for July 2014 was more than 269 million contracts, of which 86 percent was traded electronically.  CME Group open interest stands at 101 million contracts at the end of July, up 10 percent from the end of June 2014 and 20 percent year-to-date.  
http://jlne.ws/cjpXe7

BOX Price Improvement Activity for July
Press Release (BOX)
In the month of July, price improved contracts on BOX Options Exchange (“BOX”) averaged 329,089 per day, which represented a 14% increase over the same period last year. Price improvement versus the prevailing NBBO for contracts submitted via BOX’s price improvement auction, PIP, averaged $495,577 per day, while total savings to investors this month was $10.9M. With this, BOX has saved investors over $527M since its inception in 2004. Overall average daily trading volume on BOX in the month of July was 449,739 contracts, which represented a 42% increase over the same period last year.
http://jlne.ws/1kAouxx (PDF)

CME Clearing Europe Receives EMIR authorisation
Press Release (CME Group)
CME Group, the world’s leading and most diverse derivatives marketplace, today announced CME Group’s European clearing house, CME Clearing Europe, has today received authorisation as a Central Counterparty Clearing House (CCP) under the European Market Infrastructure Regulation (EMIR). The authorisation covers all OTC derivatives and futures products currently cleared by CME Clearing Europe. CME Clearing Europe lists a broad range of OTC and exchange traded derivatives, including interest rate swaps, energy and commodities, and FX contracts for clearing and provides services for CME Europe, CME Group’s London-based derivatives exchange.
http://jlne.ws/cjpXe7

ICE Benchmark Administration Completes ISDAFIX Transition
Press Release (Intercontinental Exchange)
Intercontinental Exchange (NYSE: ICE), the leading global network of exchanges and clearing houses, today announced that ICE Benchmark Administration (IBA) has formally taken over the role of Administrator of the ISDAFIX benchmark from the International Swaps and Derivatives Association (ISDA).
IBA was appointed the new administrator in April, and formally commenced its role as the administrator on Friday, August 1 2014. The ISDAFIX benchmark represents the average mid-market swap rate for four major currencies: Euro (EUR), British pound (GBP), Swiss franc (CHF) and U.S. dollar (USD), at selected maturities on a daily basis. Market participants use the rate to price and settle swap contracts and as a reference rate for floating rate bonds.
http://jlne.ws/1zNeRyN

ICE pledges to implement market-based swaps benchmark
John Bakie – The Trade News
Intercontinental Exchange (ICE) has taken over the administration of the ISDAFIX benchmark, a key rate for the pricing and settlement of swaps.
The new administrator hopes to eventually use a more reliable market-based calculation for the rate to increase confidence in the benchmark.
http://jlne.ws/1qU7d53

Technology

To Attract High Frequency Algo Traders Thomson Reuters Launches Direct Feed
Press Release (via ForexMagnates)
Thomson Reuters announced today the launch of a new direct feed service. Elektron Direct Feed provides high-performance access to real-time market data sourced directly from individual trading venues in a standardized and flexible format. Thomson Reuters already offers a consolidated feed, Elektron Real Time, which together with Elektron Direct Feed now allows it to provide its customers with real-time data in two different tiers of latency.
http://jlne.ws/1snDsqx

Strategy

Is It Time To Sell the VIX? Breaking Down The VIX Spike
Scott Murray – Investing.com
Last week saw four month highs in the VIX, the S&P 500 gauge of implied volatility. Generally, sudden demand for puts and an absence of put sellers generates swift spikes up in the VIX, and today’s demand for puts was at a ratio of 2.6 to 1, with the largest percentage of puts being hit at the asking price.
The punditry is scrambling for an explanation, and Argentinian default is a reach at best. It appeared to me that the dip buyers finally dried up and gravity took over taking out the stops. In reality, today’s not that big of a deal after months of methodically plodding higher. Let’s look at the VIX, VIX futures, and the VXX for immediate opportunities. First the VIX chart for 2014, demonstrating just how long it has been since the VIX has seen 17:
http://jlne.ws/1v3GXqC

Should You Buy VXX After the VIX Pop? 
Adam Warner – Schaeffer’s Investment Research
Well, I guess all that interest in put ownership lately was pretty prescient. Or coincidental. Or whatever. There’s no dispute that the character of the market and volatility changed in a big way last week.
The CBOE Volatility Index (VIX) closed 32% above its 10-day simple moving average on Thursday, the second distinct “pop” in two weeks. The first pop was in reaction to a pretty tiny stock drop, relatively speaking. This second one was a bit more serious; 40 handles in the S&P 500 Index (SPX) is less impressive, on a percentage basis, when there’s a full of 1,950.
http://jlne.ws/1v3HmJq

Options Education

“The Game”: An Intern Showdown
CBOE Options Hub
We’ve been hearing about it for months. Jim Bittman and Russell Rhoads call it “The Game” against Spot Trading (A proprietary trading firm located seven floors below CBOE’s Regulation Department at 440 S. LaSalle). Jim and Russell got a good amount of entertainment by not explaining how to play the game, regardless of the amount of nagging and insisting us interns did to try to get a leg up on the competition.
21 CBOE interns, not knowing anything about what we were about to get ourselves into or what the competition was like over at Spot Trading, made the trek up the 28 floors to the Spot Trading office where our unknowing fate (under)lies (bad options pun). We walked into the large corner conference room, and immediately lost our concentration after noticing the inmates at the Metropolitan Correctional Center playing basketball up on the roof of their facility. One of the more interesting views a few of us interns are lucky enough to have from the regulation department.
http://jlne.ws/1v3HJUA

 

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