JPMorgan Says Big Options Bets Swing Stocks in Thin Markets; Citadel Securities’ David Silber Says Stop Blaming Options

Sep 10, 2020

Lead Stories

JPMorgan Says Big Options Bets Swing Stocks in Thin Markets
Joanna Ossinger – Bloomberg
Low liquidity can leave stock markets particularly vulnerable to exaggerated moves around big options trades, according to JPMorgan Chase & Co.
Large options volume has attracted investor attention in recent days — first as volatility started to rise along with equities, and then on reports that Softbank Group Inc. and others plowed billions into the derivatives. One big concern, according to JPMorgan derivatives strategist Shawn Quigg, is that liquidity remains thin.

Citadel Securities’ David Silber Says Stop Blaming Options
Sarah Ponczek – Bloomberg
While burgeoning interest in options has been a big feature of the summer stock market, it isn’t the only reason equities surged or sold off, according to David Silber, head of institutional equity derivatives at Citadel Securities.
Yes, increased retail trading, along with separate buying by large institutions, contributed to swings in Nasdaq 100 shares — whipping up volatility as dealers hedged against options price drift known as “gamma.” But many other things are at work, says Silber, who confined his comments to broad market trends and declined to comment on any specific trader or investor.

How Tech Options Started Juicing the Stock Market
Yakob Peterseil – Bloomberg
The precipitous rise of U.S. technology stocks in 2020 left even seasoned veterans on Wall Street struggling for explanations. Sure, many of the companies were among the select few that had prospered during the pandemic, as online shopping and working from home proliferated. But the stock gains were so stratospheric — Apple Inc. shares doubled in five months — that some market watchers began to speculate that a traditional hedging trade might be fanning the flames. Options trading — so the theory goes — had evolved from a way for investors to protect against losses to a key driver of market frenzy.

Wall Street sees a bright side in ‘healthy’ tech selloff
Lewis Krauskopf – Reuters
Some of Wall Street’s biggest players are viewing the stock market’s recent tech-led selloff as a bout of turbulence rather than the start of a longer slide — and they don’t see it as a reason to run for the door.
Invesco this week called the Nasdaq’s sharp decline a “healthy period of consolidation” while fund manager Lord Abbett said U.S. stock valuations are likely merited, based on an analysis of companies’ earnings.

SoftBank shareholders push for answers on ‘Nasdaq whale’ bets; Japanese group urged to reveal who is running unit at centre of large US equity options trades
Leo Lewis and Kana Inagaki, and Robert Smith and Katie Martin – FT
SoftBank shareholders are calling on the technology conglomerate to reveal who is running the unit at the centre of its large US equity options trades, with nerves over an unexplained strategic shift stoking a 10 per cent decline in its share price.

How a retail options craze fuelled SoftBank’s ‘whale’ trade; Fad for short-term options complemented the Japanese group’s outsized bets
Robin Wigglesworth and Richard Henderson – FT
SoftBank caused a splash when it emerged as the “Nasdaq whale” that had placed big options bets linked to US stocks, but some analysts suspect the overall market impact may be less than that of a massive shoal of much smaller but frenzied fish — retail investors. Under the direction of founder Masayoshi Son, SoftBank has bought $4bn worth of options on big US technology stocks since the summer, with a notional value of about $30bn, according to people familiar with the matter.

Who’s hiding behind SoftBank’s hedge?
Chris Nuttall – Financial Times
US tech stocks currently look like snapping a three-session losing streak, but shares in Japan’s SoftBank, which has been implicated in stoking this year’s big rally, fell as much as 7 per cent in Tokyo today.
Its shareholders are now calling on the tech conglomerate to reveal who is running the asset management unit that it first disclosed the existence of last month. The in-house hedge fund is at the centre of its large US equity options trades in tech stocks, where bets on further price gains in some big names have meant taking on an options exposure with a notional value of $30bn.

Oil Traders Gird for More Price Swings; Recent volatility ended a stretch of calm in the oil market. Many are using options markets to bet there’s more drama to come.
Joe Wallace and Pat MInczeski – WSJ
Traders are betting on fresh upheaval in the oil market, in an abrupt turnaround from the calm of recent months. U.S. oil prices have slid 12% since the end of August, and on Tuesday notched their biggest one-day drop since June. Though the market has clawed back some of those declines, many say trading in the options market shows investors preparing for further drops, as pressures on crude prices mount from forces including a slow recovery in fuel demand and the presidential election.

Options market signals bumpy ride for Tesla shares
Thyagaraju Adinarayan – Reuters
Tesla (TSLA.O) shares edged up on Thursday in U.S. premarket trade, extending a recovery from this week’s drop, but analysts see a bumpy ride ahead as an extreme build-up in derivative positions caps the stock and precludes a full rebound.
The electric-car maker’s shares were up roughly 2% at $373.50 in premarket trading, set for the second straight day of gains to follow the previous session’s 11% rally.

Ether Traders May Be Hedging Against DeFi Slowdown: Analyst
Omkar Godbole – Coindesk
Options market data shows increased activity in ether (ETH) puts, or bearish bets. According to one trader, that reflects fears of a drop in prices led by a slump in decentralized finance (DeFi). Ether’s put-call volume ratio – a measure of activity in put options relative to calls (bullish bets) – rose to 2.45 on Wednesday. That’s the highest level since Oct. 31, 2019, according to data source Skew. In other words, more than two put options were traded against every call option – a sign of bearish market sentiment.

Exchanges and Clearing

Addition of the CME Globex Electronic Trading Venue for all Options on Weather Futures Contracts and Related Administrative Amendments to Certain Product Chapters
CME Group
Effective Sunday, September 20, 2020, for trade date Monday, September 21, 2020, and pending all relevant CFTC regulatory review periods, Chicago Mercantile Exchange Inc. (“CME” or “Exchange”) will permanently list all options on weather futures contracts (the “Contracts”) for trading on the CME Globex electronic trading platform (“CME Globex”). Also at this time, the Exchange will implement related administrative amendments to the Exercise Price rules of certain product rulebook chapters noted in Exhibit 2 below to clarify that eligible put and call options of the Contracts are listed dynamically.

Qontigo and Eurex respond to new industry classification
New ICB classification leads to one new and three redefined Supersectors; Qontigo creates new STOXX indices covering Supersectors; Eurex launches additional EURO STOXX and STOXX Europe 600 Supersector futures and options
Deutsche Börse’s index provider Qontigo and its derivatives exchange Eurex are adapting their offering to the upcoming new classification of industrial sectors. To reflect the new Industry Classification Benchmark (ICB) framework, they have announced an expansion of their sector indices and derivatives offering coming into force on September 21.

Eurex’s global MSCI offering – the perfect choice for Asia
With 136 MSCI futures and 22 MSCI options covering emerging and developed markets, Eurex is the exchange with the most comprehensive suite of global MSCI derivatives available across all time zones. Together, Eurex and MSCI, provide clients with the most diverse and innovative range of index derivatives and have signed an agreement on the long-term extension of their strategic relationship, providing the stability the market needs during these turbulent times.


(Podcast) OBC 103: In-A-Gadda-Da-Vida of Iron Butterflies
Options Boot Camp – Options Insider


Biden Will Beat Trump, Predict Market Experts at Global Investment Giant
Mark Cobley – Barron’s
Joe Biden is favored to win the U.S. presidential election in eight weeks’ time, according to market strategists at one of the world’s biggest investment managers.
Natixis, a French group which owns a stable of asset managers including bond manager Loomis Sayles and Boston-headquartered real estate outfit AEW, canvassed 36 senior economists, strategists and fund managers from across the group for their views on the U.S. election, among other topics.

****JB: Of course, there was this story from a week ago, JP Morgan stock expert tells investors to prepare for a Trump win and claims violent protests will shift polls.

Why Libor’s demise threatens small businesses most
Claire Jones – FT
In death as in life, Libor’s demise is seldom discussed without mentioning that the rate underpins contracts worth hundreds of trillions of dollars. Yet, as efforts to ditch the interest rate benchmark intensify, are we missing out on where the true difficulties in dumping Libor lie? We think most of what those in the know dub “tough legacy” contracts — that is, contracts where an alternative to the London Interbank Borrowing Offered Rate (Libor) cannot easily be found — are in the cash markets. That makes up only about a fifth of total assets underpinned by Libor with the balance derivatives. While the derivatives market has its own challenges, its financial sophistication has meant it’s in a far stronger position in preparing for transition. By focusing more on the overall size of the market, we’re underestimating the massive implications the death of Libor will have on lending to businesses — especially smaller ones.

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