Lead Stories

Well-timed bullish option bets seen in Digital River weeks before deal
By Saqib Iqbal Ahmed, Reuters
Well-timed bullish options bets on Digital River Inc were placed about two weeks before the e-commerce services company said on Friday it would be taken private.
Digital River’s stock rose 48 percent to $25.75 on Friday, a day after the Minnesota-based company said it entered into an agreement to be bought by an investor group led by Siris Capital Group LLC for $26 a shares.
http://jlne.ws/1oCXiQB

The Good News With a Bad Case of Volatility
By Wayne Arnold, Dow Jones Business News
To hear the financial community tell it, we are all about to die from an incredibly contagious, painful and frightening disease — you guessed it, volatility.
Volatility has hit global financial markets and you, the investor, should be hiding under your bed, calling your broker and re-allocating your entire portfolio to minimize your exposure to this virulent pathogen.
http://jlne.ws/1oCYCDg

Weekend Reads for Investors: Volatility and the “Yellen Put”
By David Larrabee, CFA Institute
Categories: Behavioral Finance, Economics, Equity Investments, Linkfest, Portfolio Management
Investors: Volatility and the “Yellen Put”    
Up until last week’s wild ride for stocks, volatility had been largely absent from the market and far from the minds of investors. However, the cumulative effect of ongoing geopolitical chaos, spreading Ebola anxiety, and uninspiring economic data, combined with the rumored unwinding of some leveraged positions by hedge funds, served to at least temporarily jolt global equity markets. Complacency was quickly replaced with panic and we got a reminder of what happens when everyone heads for the exit at the same time.
http://jlne.ws/1siNlm1

Burger King Bears Surge Amid Tim Hortons-Deal Anxiety
Inyoung Hwang and Leslie Patton – BloombergBusinessweek
Investors concerned that tighter U.S. rules for cross-border deals will kill Burger King Worldwide Inc.’s merger with Tim Hortons Inc. (THI) are flocking to the options market.
Bearish contracts on the Whopper maker cost the most ever versus bullish bets as trading in the options surged. Short interest (BKW:US) on Burger King, which agreed in August to buy the Canadian coffee-and-doughnut chain for $11 billion, has jumped fivefold since the deal was announced.
http://jlne.ws/1wwNCIl

Options Traders Bearish Turkish Lira on Risks to Economy
By Selcuk Gokoluk
Derivatives traders are about the most bearish they’ve been in five months concerning the outlook for the Turkish lira.
Investors are paying a 5.3 percentage-point premium for options that grant the right to sell the lira against the dollar during the next year over those that give the right to buy the Turkish currency, according to risk reversal data on Bloomberg. That’s close to the most since May and is exceeded by only the Argentine peso, Russian ruble and South African rand among 46 currencies worldwide.
http://jlne.ws/1siPf6h

The VIX Takes a Hairpin Turn
Reid Steadman, Vice President, Non-Equity Indices, S&P Dow Jones Indices
VIX Views
I have a neighbor who is cooler than me. He is braver than me. He also has more expansive and expensive medical and auto insurance than I do. How do I know all this? Well, he races street motorcycles.
The other day I asked him what was the fastest he had ever gone. His answer: “Very fast, but that’s not where the thrill is. The adrenaline rush comes from handling and powering through the curves.”
The movements in the CBOE Volatility Index (VIX) the past few weeks have made me reflect on this conversation.
http://jlne.ws/ZX3ypq

Wall Street shrugs off Ebola worries
Dave Shellock, The Financial Times
Friday 21:00 BST. Weak results from Amazon and the latest Ebola scare failed to derail Wall Street’s upward march, as fading concerns over slowing global growth and renewed expectations for central bank policy accommodation supported a strong rally for global equities this week.
Indeed, the S&P 500 recorded its biggest weekly rise of the year – although memories of the extremely turbulent market conditions seen recently lingered in the minds of some participants.
http://jlne.ws/1tkBB9e

Exchanges

Shanghai exchange ready for options rollout
Gabriel Wildau in Shanghai, The Financial Times
The Shanghai Stock Exchange has completed technical preparations for stock options trading and is awaiting final approval from regulators to launch the first new equity derivative product to debut in China since the global financial crisis, an exchange official said on Friday.
“The exchange has already completed its arrangements for ETF options. Testing by brokerages is also completed. Technically speaking there’s no problem,” Hu Ruying, the exchange’s chief economist, said at a forum on Friday.
http://jlne.ws/1oCZ0Sj

Regulation and Enforcement

SEC Wants Exchange-Traded Funds to Be Easy to Trade
Matt Levine – Bloomberg
Classically an exchange-traded fund is a derivative: It’s a contract whose value is based on the value of a basket of underlying stocks. (Bonds, whatever.) The contract trades on an exchange — thus the name — and so it has a trading price, but it also has a value that you can calculate. You can replicate it by buying the underlying stocks, or hedge it by selling them. So the value of the ETF is very well defined and transparent, and its price should closely reflect that value. That’s nice!
http://jlne.ws/1rsI0Zl

Strategy

Stocks: How to Play Defense
Specialized Funds Designed to Hedge Risk May Not Be the Best Choice
John F. Wasik, The Wall Street Journal
The stock market has been taking investors on a white-knuckle ride in recent weeks. Some of the ways investors try to manage volatility can be nerve-racking, too.
The S&P 500 has fallen more than 1% six times and risen more than 1% five times since the index hit an all-time high on Sept. 18. By contrast, there weren’t any such single-day swings between Aug. 9 and Sept. 24.
Jittery investors are worried about the U.S. economic recovery, higher interest rates and slow growth in Europe, among other issues. Strong gains in recent years have boosted share prices and stoked concerns that stocks are priced too high.
http://jlne.ws/1oD0aNo

2 Charts Revisited: The Put Call Ratio And VIX Term Structure
Ryan Detrick, See It Market
Back on October 7, I wrote this piece that focused on two bearish indicators and I said we could see some near-term weakness in the market. After a quick 4% drop in a week, we bounced and formed a nice looking V-bottom.
Check out this chart of the S&P 500 (SPX):
I said at the time that I wanted to see both the CBOE options equity put/call ratio and the CBOE Volatility Index (VIX) switch to bullish before I could personally turn bullish again. Well, we could be there.
http://jlne.ws/1tkBhak

 

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