The Low Vol Puzzle; Post Bank say BOJ should sell puts; Buying dips

Nov 16, 2017

Observations & Insight

FANG+ Puts the UMPH Back into the Markets and Exchange Competition
John Lothian – JLN

Hallelujah! The magical power of innovation from exchange competition in Chicago is alive and well after a noticeable absence. The NYSE FANG+ index at ICE Futures US is the most innovative and timely new contract I have seen since the Cboe introduced the VIX.

Besides the FANG+ contract, we have the expectation of the CME Group and Cboe slugging it out later this year with competing bitcoin futures offerings. Earlier this year we had the CME Group reclaim the Russell index complex from ICE, returning the contracts to the CME where they were in 2007.

For the rest of the commentary, go HERE

Lead Stories

The Low Volatility Puzzle: Is This Time Different?
David Lucca, Daniel Roberts, and Peter Van Tassel – Liberty Street Economics
As stock market volatility hovers near all-time lows, some analysts are questioning whether investors are complacent, drawing an analogy to the lead-up to the financial crisis. But, is this time different? We follow up on our previous post by investigating the persistence of low volatility periods. Historically, realized stock market volatility is persistent and mean-reverting: low volatility today predicts slightly higher, but still low, volatility one month and one year from now. Moreover, as of mid-September, the market is pricing implied volatility of 19 percent in one to two years’ time. This level contrasts with the pre-crisis period when the term structure of implied volatility was relatively flat, which suggests this time may indeed be different, at least as measured by market participants’ pricing of risk.

****SD: Bloomberg on the post – New York Fed Sees a Healthy Fear in the Volatility Curve

Bank of Japan should consider selling put options on Japan stocks: Japan Post Bank CIO
Tomo Uetake, Hideyuki Sano – Reuters
The Bank of Japan should consider using derivatives, rather than buying Japanese stock funds directly as it does now, to affect risk premium on stocks, because that would be a better tool, said the chief investment officer of Japan Post Bank.

The low volatility illusion; The stock market is riskier than it looks with the average volatility of S&P major subsectors on the way up
David Goldman – Asia Times
On the face of it, equity markets have never been safer. The cost of hedging against declines in major equity indices during the past three months has been the lowest on record, even lower than in 2006, when everyone knew that good times would last forever and that equity markets would do nothing but go up.

Why They Can’t Resist the Dip: Best Earnings Guidance Since 2010
Lu Wang – Bloomberg
S&P 500’s six days of V-shaped bounce is rare in history; Helping stocks stay buoyant is solid corporate profit
Indecision is getting so pronounced it’s becoming predictable.

****SD: Barron’s take – This Market Isn’t Ready to Surrender

Watcha Doin’ Harvard? Why a Bet Against the VIX Is Just Plain Weird
Crystal Kim – Barron’s
….Harvard Management Company took the other side of the bet on volatility, according to filings submitted to the Securities & Exchange Commission last week.

LIBOR: The End of The World As We Know It (And I Feel Fine?)
Bracewell LLP
A few months ago, the head of the UK’s Financial Conduct Authority announced that it will stop requiring the reference banks to submit sterling quotes for LIBOR, the interbank lending rate, by the end of 2021. The acronym refers to the London-based unsecured wholesale market rates for jumbo deposits between major banks that are denominated in certain designated currencies. LIBOR is the most commonly used floating interest rate at which banks lend to each other, and is incorporated in several trillions of dollars of U.S. commercial loan products, including commercial mortgages, guaranties, derivatives, securitized and packaged consumer loans and other credit support documents.

Exchanges and Clearing

Bitcoin futures face safeguards to tackle wild gyrations; Exchanges insist on higher collateral and price caps amid calls to ringfence trades
Gregory Meyer, Nicole Bullock and Joe Rennison – FT
Traders eagerly awaiting the debut of bitcoin futures will face tougher risk standards says the chief executive of the CME Group as the exchange operator plans to launch contracts on the highly volatile cryptocurrency.

****SD: John gets quoted in here.

Interactive Brokers Chairman: Bitcoin Futures Endanger “Entire Economy”
Rachel McIntosh – Finance Magnates
“Cryptocurrencies do not have a mature, regulated and tested underlying market,” wrote Thomas Peterffy, Chairman of Interactive Brokers. “The products and their markets have existed for fewer than 10 years and bear little if any relationship to any economic circumstance or reality in the world.”

EEX acquires 100% of Powernext
The European Energy Exchange (EEX), the leading energy exchange in Europe, has acquired the remaining 12.3% shareholding in French based Powernext from 3GRT and EDF. In doing so, EEX becomes the sole owner of Powernext with immediate effect.

Deutsche Boerse board to decide on new CEO on Thursday – FAZ
Reuters Staff
Deutsche Boerse’s supervisory board is to meet on Thursday to pick a successor to Chief Executive Carsten Kengeter, and Unicredit’s Theodor Weimer is the directors’ favourite candidate, daily Frankfurter Allgemeine Zeitung (FAZ) reported.

Eurex launches new FI hedging tools
Following the introduction of corporate bond futures, Eurex – a part of Deutsche Bˆrse Group – once again acts as first mover in the fixed income derivatives markets. To further support the financial industry in hedging their portfolios, Europe’s leading derivatives exchange launches options on fixed income ETFs.

Swiss bank to launch bitcoin futures to allow betting against cryptocurrency
Reuters Staff
Swiss bank Vontobel said it will start trading Switzerland’s first two mini futures to short bitcoin on Friday, giving investors a tool to bet against the value of the volatile cryptocurrency or to hedge bitcoin positions.

Regulation & Enforcement

The Frustrating Wait to See the Effects of MiFID II
Thomas Krantz, Thomas Murray – Tabb Forum
The new shape of the EU capital markets will not take form immediately, judging from how long it took to see with any certainty recurring patterns in trading after the implementation of Reg NMS in the US and MiFID I in the EU. Expect a period of 12 to 18 months in which time the order flows and ways of execution will have settled under the new regime. What will happen to price formation? Where will liquidity concentrate? The waiting and watching for MiFID II’s effects will not make for an especially tranquil start to the new year.

The CFTC is on a technology-centered drive, says its chairman
Huileng Tan, CNBC via Yahoo
The Commodity Futures Trading Commission is on a drive to move into a more technology-centered market environment, its chairman said Wednesday.


Using options as a positioning tool for IPO stocks
Gary Delany, OIC –
Using exchange-listed options as a positioning tool for IPO stocks Markets trade on information. Initial public offerings, or IPOs, can be large events that are popular with investors. An IPO is when a new or existing company first issues stock to the public. As well as raising capital for corporate development, IPOs are often used to reward the original, pre-IPO investors in the firm. Investors should note that as with any stock, IPOs can go up or down.

Options for Low Volatility: Setting Up and Rolling Calendars
The Ticker Tape
Option traders interested in premium collection strategiesóthose that profit from time decayóoften turn to short strategies such as iron condors or short verticals. These can be considered “credit” trades. But there are debit option strategies that also profit from time decay, such as the calendar spread. In this two-part series, we’ll look at calendars and how traders can set them up and roll them at expiration.


John Davidson to speak at November 30 SIFMA Listed Options Symposium in New York
On November 30th, industry experts, representing various roles across the market segment, will examine the state of the options market and the challenges and opportunities facing investors and market participants at SIFMA’s Listed Options Symposium. The program will include a data-driven look at recent trends and current issues in today’s options markets, followed by interactive discussions on what’s impacting market activity, such as liquidity, regulation, fragmentation, clearance and settlement issues, CAT, competition, the mix of market participants, and more. OCC’s President and Chief Operating Officer, John Davidson, will join the Regulation and Risk panel to discuss the various regulations, complexity in the markets, as well as the necessary changes to legacy systems and rules, including an initiative to revamp the CMTA platform.

****SD: In case you missed it.


Ackman Q3 Letter: Corker Resignation Is Bullish For Fannie
Ackman Q3 letter to investors first some excerpts on Fannie Herbalife where he blames Icahn for the squeeze and more below.

***SD: Discussion of Ackman’s options positions included.

Goldman Sachs Create Frankfurt Holding Company Ahead of Brexit
Eyk Henning – Bloomberg
Holding company said to house German, Spanish businesses; This doesn’t mean jobs leave London yet, people familiar say

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