JLN Options: Why Options Funds Aren't a Buy; Chicken Little is Back! The Sky is Falling (umm, not really); I Generally Agree With Doug Kass on VXX

Nov 4, 2013

Lead Stories

Why Options Funds Aren’t a Buy
Steven M. Sears – Barron’s
One of the investment world’s many curiosities is why covered-call mutual funds are often such mediocre performers, even though their strategy is a great way to reduce risk and enhance returns.

Chicken Little is Back! The Sky is Falling (umm, not really)
Bob Lang – Explosive Options
Chicken Little is back to tell us that the market is way overvalued and due for a decline. After all, it’s been more than two years since there was a 10% correction in the SPX 500 or Dow Jones Industrials (according to the Stock Traders Almanac). Hedge fund managers are tossing out warnings, analysts are preparing for the worst, and the bearish crowd is still barking about an impending crash.

I Generally Agree With Doug Kass on VXX
Mark Sebastian – The Street
Doug Kass authored a piece on iPath S&P 500 VIX ST Futures ETN (VXX) how bad of a product the Exchange-Traded Note is. He advised traders to say away from the product. My response would be that he is mostly right, and for the large majority of traders, the VXX is not the right product for their portfolio. That said, the VXX does exactly what its prospectus says it will do.

Videocast: Low VIX seen for months

NYSE Experiences Data Malfunction Days Before Twitter IPO
Sam Mamudi – BloombergBusinessweek
NYSE Euronext (NYX:US) experienced two technical malfunctions during the first 40 minutes of trading, three days before it handles Twitter Inc.’s initial public offering.

Volatility ETFs On Downhill Ride
ETF Daily News
The American economy heaved a sigh of relief after it averted a costly debt default. While this sent the S&P 500 and Nasdaq into a rally, volatility ETFs took a backseat to other factors. Along with the debt deal, reduced possibility of tapering offered a wild card entry to equities but emerged as threats to the volatility ETFs.

Best Stock Market Since 1997 Seen With S&P 500 Momentum
Lu Wang & Whitney Kisling – Bloomberg
The broadest equity rally on record will pick up speed through year end and lift the Standard & Poor’s 500 Index to the biggest annual increase in 16 years, if history is any guide.


U.S. options exchanges set to list Twitter options on Nov. 15
Investors will have their first opportunity at using options to hedge their bets or speculate on the direction of Twitter Inc shares in two weeks when U.S. options exchanges are expected to list contracts on the stock.

Latest Nasdaq options glitch highlights ongoing market problems
Nasdaq OMX Group Inc closed its second-largest options market for much of Friday after a spike in volume hampered the exchange’s ability to accept orders and distribute quotes, the latest glitch to hit US market operators.

CBOE Holdings Reports October Volume
Press Release (CBOE)
CBOE Holdings, Inc. (NASDAQ: CBOE) reported today that October trading volume for options contracts on Chicago Board Options Exchange (CBOE) and C2 Options Exchange (C2SM) and futures contracts on CBOE Futures ExchangeSM (CFE)  totaled 126.24 million contracts. Average daily volume (ADV) was 5.49 million contracts, a 15-percent increase from September 2013 and a 34-percent increase from October 2012.

CBOE Futures Exchange Reports October Trading Volume
Press Release (CBOE)
The CBOE Futures Exchange, LLC (CFE) today reported  October 2013 trading volume for total exchange-wide activity and for futures on the CBOE Volatility Index (VIX).  Additionally, the exchange said Phase I of the expansion of extended trading hours for VIX futures successfully launched during the month.

BATS Global Markets Announces October Highlights
Press Release (BATS)
BATS Global Markets (BATS) today reports October market share and activity, which includes U.S. Department of Justice clearance for the BATS-Direct Edge merger, and the launch of BATS Chi-X Europe’s pan-European listings business and BXTR pan-European Trade Reporting Service.
BATS’ European equities exchange, BATS Chi-X Europe, posted overall market share of 22.9% in October, with a new monthly market share record of 9.6% set in Depositary Receipts (FTSE ROIB), surpassing the previous record of 9.0% set in July 2013.
http://jlne.ws/1a3mS6n (PDF)

BOX Price Improvement Activity for October
Press Release (BOX)
In the month of October, price improved contracts on BOX Options Exchange (“BOX”) averaged 160,131 per day. Price improvement versus the prevailing NBBO for contracts submitted via BOX’s price improvement auction, PIP, averaged $278,144 per day, while total savings to investors this month was $6.4 MM. With this, BOX has saved investors over $457 MM since its inception in 2004. Overall average daily trading volume on BOX in the month of October was 357,021 contracts, a 2.9-percent increase over the previous month.
http://jlne.ws/HCJr8M (PDF)

Options Exchange Marketshare – October 2013

October 2013 Total Options Marketshare:  (via email from OCC)

AMEX-                 12.45%
BATS-                     3.62%
BOX-                       2.04%
CBOE-                   28.46%                                                           
C2-                          1.92%
GEM-                      2.26%
ISE-                        13.72%
MIAX-                     1.62%
NOBO-                    0.84%
NSDQ-                    8.05%
NYSE Arca-           10.14%
OMX PHLX-         14.88%

October 2012 Total Options Marketshare:

AMEX-                  16.20%
BATS-                      3.55%
BOX-                        3.33%
CBOE-                    24.39%
C2-                            1.32%
ISE-                          15.52%
NOBO-                     0.78%
NSDQ-                      6.05%
NYSE Arca-             10.03%
OMX PHLX-           18.83%
 October 2013 Equity Options Marketshare:

AMEX-                  13.80%
BATS-                      4.03%   
BOX-                        2.28%
CBOE-                    20.56%
C2-                            2.13%
GEM-                        2.51%
ISE-                         15.25%
MIAX-                       1.80%
NOBO-                     0.94%
NSDQ-                     8.95%
NYSE Arca-           11.20%
OMX PHLX-          16.55%

October 2012 Equity Options Marketshare:

AMEX-                 17.60%
BATS-                      3.87%
BOX-                       3.62%
CBOE-                   18.20%
C2-                            1.39%
ISE-                        16.78%
NOBO-                    0.85%
NSDQ-                    6.57%
NYSE Arca-          10.87%
OMX PHLX-         20.25%


Regulation and Enforcement

CME Group chief testifies in long-awaited grain settlement trial
Tom Polansek – Reuters
CME Group Inc Chief Executive Phupinder Gill on Friday denied that the exchange-operator changed its settlement rules to give electronic grain traders an advantage over veterans of the Chicago trading floor, who have sued the company, saying its new rules are killing their business.

How futures industry regulators blew it at AlphaMetrix
Lynn Marek – Crain’s Chicago Business
Futures regulators just blew it again.
After failing to detect massive mismanagement at MF Global Inc. and Peregrine Financial Group Inc. before it was too late, the industry’s self-regulators now have been blindsided by the meltdown of AlphaMetrix LLC, a Chicago-based tech financial company that ceased trading and began an “orderly liquidation” of customer funds last week.

SAC, U.S. to Announce Record Insider-Trading Settlement
Jean Eaglesham – The Wall Street Journal (via Yahoo Finance)
Hedge-fund group SAC Capital Advisors LP and federal prosecutors in Manhattan are expected to announce a record insider-trading settlement Monday, according to a person familiar with the matter.


The Evolution Of The Holiday Effect In VIX Futures
Bill Luby – ETF Daily News
With fewer trading days and a historical record that favors an uptick in stocks and a downtick in volatility, the end of the year never fails to present an intriguing set of trading opportunities.

Two Ways to Play Anti-Volatility
Adam Warner – Schaeffer’s Investment Research
I want to apologize again for missing that the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) had already announced a 1:4 split. Consider yourself lucky, though. If I hadn’t missed it, I would have poked fun at the VXX in about 12 separate posts.

Options Education

Picturing Option Profits – Part 3
Russ Allen – MoneyShow.com
In last week’s article, which you can read here, I discussed gamma and option payoff diagrams. I showed a price chart of GLD, and an option payoff diagram for a November 130/135 bear call spread, which are reproduced below. I left you with these cliff-hanging questions:
Do we want high gamma or low gamma? Positive or negative? Is it a good thing or bad? And how does the diagram show us any of that?
**I somehow missed the first two articles which you can find here: Part 1, Part 2. -JB


OIC Announces Investor Education Day in Atlanta November 16 [Free]
Press Release (OIC)
The Options Industry Council (OIC) today announced that its next Investor Education Day (IED) for 2013 is taking place in Atlanta, GA on November 16…
The Investor Education Day offers two different tracks for attendees based on their investment experience and skill level – Options Basics or Advanced Strategies.



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