Observations and Insights

MarketsWiki World of Opportunity Summer Intern Series Goes to London
John Lothian & Co. is pleased to announce the MarketsWiki World of Opportunity Summer Intern Education Series is coming to London on July 1st and 2nd, 2014 with the generous support of the CME Group.

Lead Stories

Wall Street Is Depressed, and That’s a Buy Signal
Steven M. Sears – Barron’s
With the Standard & Poor’s 500 index trading around a record high, Wall Street is as nervous as a long-tailed cat on a porch full of rocking chairs.
The common view is that many stock prices are higher than merited by corporate earnings and economic conditions. The market strategists at Bank of America Merrill Lynch say the pessimism among their peers at other banks is at the highest level since the market lows of 2009.

Calendar Axiom Broken, But Valuations Are A Concern – Market Outlook
Price Headley – CBOE Options Hub
So much for the “Sell in May” axiom.  The market just logged its second bullish week in a row at a time of year that’s not supposed to be bullish at all.  For May, the S&P 500 (SPX) (SPY) gained an impressive and surprising 1.8%.  
Is this a sign that stocks are just so hot and so underestimated that there’s just no stopping them?  Or, were the past couple of weeks just a little lucky volatility we’ll end up paying the price for in June in the form of a pullback?

Lowest VIX Monthly Close Since January 2007
Moby Waller – CBOE Options Hub
Option implied volatility continues to stay low with the S&P 500 (SPX) (SPY) hitting new all-time highs recently (and downside volatility in the Nasdaq lessening greatly) – other factors involved in the dropping CBOE Volatility Index (VIX) (VXX) include seasonality (many traders are on vacation this time of year and trading volume tends to slow up), the recent narrow overall range in the broad market and the rather slow creep to new highs.

Is the VIX “Low”? SPX Historic Volatility Plunges to 7.88
Matt Moran – VIX Views
Lately I have heard inquiries from some stock investors as to whether the CBOE Volatility Index (VIX) recently has been at “low” levels; today it closed at 11.40. VIX is a reflection of the market’s expectations regarding future stock market volatility. To gain insights as to what expected volatility could be, options traders examine many factors, including historic volatility, which looks back at the past price movements of securities. Today the 30-day historic volatility of the S&P 500 (SPX) Index dropped to 7.88, its lowest level since August 2013 (source: Bloomberg).

Fed officials growing wary of market complacency
Jon Hilsenrath – MarketWatch
Federal Reserve officials, looking out at mostly calm financial markets, are starting to wonder whether tranquility itself is something to worry about.
So far this year the U.S. economy has suffered a brief economic contraction, the Fed has begun winding down a major bond-purchase program meant to spur growth, the Obama administration has clashed with Russia over its annexation of Crimea, China’s economy has slowed and the Middle East has become a cauldron of civil strife.

Can the low volatility bargain hold?
James Saft – Reuters
It is this year’s bargain: central banks will remain easy, allowing asset prices to march higher despite all those pesky details about growth and inflation.
There is lots of evidence to show this is a genuine phenomenon – the ECB is expected to ease on Thursday, perhaps in new and creative ways, and the Federal Reserve, while theorizing about some fine day it will raise rates, is careful not to encourage any breath-holding.

Volatility Update: Long-View VIX a Different Picture
JJ Kinahan – CBOE Options Hub
As the calendar flips to June, no data point looms larger than Friday’s payrolls report. It’s a thin calendar for economic reports and earnings this week anyway, and that means the jobs data will be subject to more scrutiny than usual. Investors will lean on the marquee report for proof that recent strength in both stocks and bonds has been justified. Or, is it possible that this report will bring the volatility needed to shake up the broad indexes one way or the other?

Is It Time to Ditch Low-Volatility Names?
The relationship between bonds and this low-volatility ETF
Adam Warner – Schaeffer’s Investment Research
In a world of low volatility, one would expect a fund comprised of low-volatility stocks to have performed well. And in 2014, that has been the case for the most part.
But is that about to end?

Videocast: Fallout from slow VIX

Cameron Smith: Stock Investors Can Handle the Truth
Cameron Smith – The Wall Street Journal
Most investors would be surprised to learn that current stock-market regulations actually prevent them from seeing and receiving the best price. Why? Well, in 2005 federal regulators at the Securities and Exchange Commission decided, in the immortal words of Jack Nicholson in “A Few Good Men,” that investors “can’t handle the truth” and that seeing true market prices would only confuse them.

RBI eases investment rules for currency derivatives
The Financials Express
The Reserve Bank of India’s decision to permit foreign investors to participate in the exchange-traded derivatives segment is deemed as a key positive measure, which could enhance the liquidity of this platform. In its latest credit policy, RBI announced that global investors are allowed to participate in India’s exchange-traded currency derivatives market to the extent of their underlying exposures plus an additional limit of $10 million.


BATS Global Markets Announces May Volume and Activity
Press Release (BATS)
BATS Global Markets (BATS) today reported May volume, market share, and monthly highlights:
– In the U.S., BATS reported 20.1% U.S. equities market share in May, up from 10.4% a year ago. BATS Options reported 3.8% market share, in line with one year ago.
http://jlne.ws/1orO4BC (PDF)

CME Group Volume Averaged 13.0 Million Contracts per Day in May 2014, Up 6 Percent from April 2014
Press Release (CME)
– Eurodollar futures volume increased 10 percent and Eurodollar options volume increased 42 percent from prior May
– Highest 2014 daily volume of 20.1 million contracts traded on May 28
– Year-to-date 2014 volume averaged 13.2 million contracts per day, up 4 percent from year-to-date 2013
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that May 2014 volume averaged 13.0 million contracts per day, up 6 percent sequentially but down 12 percent from May 2013.  Total volume for May 2014 was more than 273 million contracts, of which 86 percent was traded electronically.  

Regulation and Enforcement

Massad Heads to U.S. Swaps Agency as Wall Street Seeks Rollback
Silla Brush – Bloomberg
For almost five years, the head of a once obscure U.S. agency fought Wall Street to impose curbs on derivatives that helped ignite the 2008 financial crisis. His successor, Timothy Massad, must now decide how to finish the job.
Massad, nominated last year to replace Gary Gensler at the Commodity Futures Trading Commission, is expected to be confirmed as chairman by the U.S. Senate as soon as this week.


Capturing aluminum’s embedded call option
Howard L. Simons – Futures Magazine
Famous last words and epitaphs are an endless source of amusement and the sort of inspirational quotes various newsletter writers think you need before you are jolted awake by your morning coffee. While futures traders as a whole have been deficient in this department, may we suggest inscribing, “If you can store it profitably, do so” across the gates to the Tomb of the Unknown Trader.

Options Education

Implied Volatility is a Big Factor for Bull Put Spreads
Dan Passarelli – The Options Insider
Even though implied volatility has been relatively low in the market, there will be a day when it does rise again. Implied volatility (IV) by definition is the estimated future volatility of a stock’s price. More often than not, IV increases during a bearish market and decreases during a bullish market. The reasoning behind this comes from the belief that a bearish market is more risky than a bullish market.


FOW and DCE partner on first international China options event
Press Release (FOW)
With options to launch in China this year, FOW and DCE present the first commodity options event
FOW and the Dalian Commodity Exchange are delighted to announce that the inaugural China Commodity Options Forum will take place on 16 September in Dalian China.



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