JLN Options: Why Bother With XIV?; Autumn shadows lurk for global stocks; Shorts Scamper Into Silver as ETFs

Aug 26, 2014

Observations and Insight


Ed Tilly, CEO of CBOE – Embrace Change

“We were challenging people’s livelihoods…”

Reaching our goals in life does not always involve a linear path. Ed Tilly, CEO of the Chicago Board Options Exchange, discusses the long and winding road he followed in his career and key experiences that helped him get where he is today. He stresses that examining your own strengths and weaknesses and knowing the limits of your abilities is one of the keys to success. Making mistakes and taking chances are two other important areas that help us learn and grow in our careers. “You will fail,” he tells his audience, “and that’s okay.” For Tilly, not receiving a nomination to the CBOE’s Board of Directors motivated him to try again and come back the next year with fresh ideas to help improve the exchange.

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Lead Stories

Why Bother With XIV?
Adam Warner – Schaeffer’s Investment Research
In focus: 200 on SPDR S&P 500 ETF Trust (SPY) and 2,000 on S&P 500 Index (SPX)!
It’s party time, and everyone wants to celebrate, including volatility sellers. As Bloomberg noted last week, VelocityShares Daily Inverse VIX Short Term ETN (XIV) volume is increasing. That’s, of course, more or less the same thing as shorting iPath S&P 500 VIX Short-Term Futures ETN (VXX). But fear not, shorting VXX is staying trendy, too:

Autumn shadows lurk for global stocks
Jamie Chisholm – Financial Times
Mr Wilkinson looks at option pricing to interpret how the market sees the probability of the extreme forecasts being hit by the end of next year. There’s a 32.3 per cent chance of the S&P falling to 1,850 and just a 10.4 per cent chance it will climb to 2,300, he says.

Shorts Scamper Into Silver as ETFs
Tom Lydon – ETF Trends
At the moment, it looks like silver bears have the upper hand. “Open interest the Comex market climbed 3.9 percent to 212,249 futures and options contracts in the week ended Aug. 19, U.S. government data showed Aug. 22. That’s the highest since June 18, 2013. Money managers have boosted their short wagers for four straight weeks, the longest streak since April. Long holdings have declined for six weeks to a two-month low,” reports Debarati Roy for Bloomberg.

Cutting edge: Incorporating forex volatility into commodity spread option pricing
Joseph Yechong Chen – Risk.net
In this article, Joseph Yechong Chen extends Kirk’s formula to spread option pricing when forex is a stochastic factor and is multiplied to one leg in the payoff formula. The article illustrates the importance of forex risk factors and the need to include them in the business strategies of asset acquisitions and divestitures.

CBOE’s Ed Tilly Takes ALS Ice-Bucket Challenge
I’m a little wet and the water was cold, but I was thrilled to participate in the ALS Ice-Bucket Challenge this afternoon. I’ve challenged three others to do the same – Steve Sears of Barron’s, Rich Repetto of Sandler O’Neill, and market commentator Jon Najarian.


CBOE Holdings Announces New Officer Promotions (NASDAQ:CBOE)
Press Release (CBOE)
CBOE Holdings, Inc. (NASDAQ: CBOE) today announced that Chicago Board Options Exchange (CBOE) has promoted five staff members to officer positions. The promotions were approved at this month’s Board of Directors meeting.
–    Jim Enstrom was named Vice President and Chief Audit Executive. He will continue to direct CBOE’s internal audit programs as head of CBOE’s internal audit function. Enstrom, who joined CBOE in 2009, received his master’s degree from Arizona State University and is a graduate of the University of Illinois.
–    Lita Frazier was named Vice President, Government Relations. She will continue to serve as CBOE’s voice in Washington, leading CBOE’s government relations efforts at the federal, state and local levels. Frazier, who joined CBOE in 2006, is a graduate of The George Washington University.
–    Alicia Goldberg was named Vice President, Statistical Analysis. She will continue to direct CBOE’s statistical product offerings for Trading Permit Holders and Market Data Express (MDX). Goldberg, who is a 34-year veteran of CBOE, studied computer science.
–    Jim Lubin, who is Senior Managing Director, CBOE Futures Exchange (CFE), was also named Vice President, CBOE. He will continue to serve as head of CFE’s operations and business development efforts, a role he has held since 2011. Lubin received his M.B.A. and bachelor’s degrees from Adelphi University.
–    Andy Spiwak was named Vice President, Regulatory Services. He will continue to lead enforcement programs for CBOE. Spiwak, a 27-year veteran of CBOE, is a graduate of The John Marshall Law School and University of Wisconsin – Madison.

Regulation and Enforcement

Swaps Boom Is Unintended Consequence of New Curbs on Wall Street
Lisa Abramowicz – Bloomberg
The $9.8 trillion U.S. corporate-bond market may look pretty sleepy right now, but there’s more and more happening in its shadows.
Instead of bothering with trading investment-grade bonds themselves, investors are increasingly turning to derivatives tied to the creditworthiness of specific companies. Volumes in such synthetic wagers have surged to the highest levels since at least the beginning of 2011, in many cases outpacing trading in the underlying bonds, according to Barclays Plc (BARC) data.

The S.E.C.’s Use of the ‘Rocket Docket’ Is Challenged
Dealbook – NY Times
There is a nickname litigators use for courts that push cases through the system with great alacrity: the “rocket docket.” Perhaps the most famous is the United States District Court for the Eastern District of Virginia, where complex civil cases will wrap up discovery in a few months and be decided in less than a year.

Calls mount for US-EU swaps rules recognition
Anish Puaar – Financial News
A lobby group whose members include some of the most well-known names in finance has urged regulators in the US and European Union to agree a coordinated approach to new rules governing the swaps market to prevent severe disruption to cross-border over-the-counter derivatives trading.

CFTC names Secretary of the Commission
Automated Trader
Christopher J. Kirkpatrick was named Secretary of the U.S. Commodity Futures Trading Commission (CFTC) today. He will lead CFTC’s Office of the Secretariat. As Secretary, Mr. Kirkpatrick will manage the processes that bring matters to the Commission for consideration and action as it continues to implement the Dodd-Frank Act and proceeds with ongoing enforcement and market oversight activities. He will also play a key role in the preservation and management of the Commission’s records, including industry filings and rulemaking records.


Options on CBOE Shares Offer Play on a VIX Pop
Steven M. Sears – Barron’s
In early August, CBOE Holdings was smacked with a dreaded Sell recommendation, a rarity for Wall Street analysts.
Lackluster second-quarter earnings and weak trading volumes spurred S&P Capital IQ’s analyst Ken Leon to cut the exchange-company’s price target to $45 from $57. He warned clients that slow trading volumes would depress CBOE’s (ticker: CBOE ) earnings through 2015.

Options Education

5 misguided myths about stock-market volatility
Jeff Reeves – MarketWatch
Everywhere you watch or read these days, there seems to be a lot of talk about the risks of market volatility — whatever that means.
For pessimists, volatility is a good buzzword. It starts with the same letter as “valuation,” the other complaint about the stock market because of companies’ slightly elevated price-to-earnings ratios.
It also plays on the same emotion (fear) as other sure signs of a bubble: market manipulation by the Federal Reserve, the risk of inflation caused by the Fed and, I could imagine, the invasion of Ebola-infected Muslim fundamentalists, probably also caused in some way by the central bank.


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