Markets Were Already Braced for Chaos—and Then Came the Diagnosis; HSBC’s Wild Ride Pushes Hedging Costs to Highest in a Decade

Oct 5, 2020

Observations & Insight

****JJL: Last night Nasdaq VOLQ officially launched for trading on the CME. You can track it here. So far, there are no trades.

VOLQ is acclaimed by Nasdaq and CME Group as a better measure of the index option market, specifically anticipated future up or down moves for the Nasdaq-100 (NDX).

This volatility index alternative to the VIX is more complementary than challenger, giving traders a second volatility product to trade, and one that helps with the popular Nasdaq-100 index.

VOLQ uses at-the-money (ATM) options to calculate implied volatility, whereas VIX uses lots of out-of-the-money options. The VOLQ landing page at Nasdaq is HERE.


The Spread: Radio Killed the Video Star

This week on The Spread – election volatility makes options more expensive, the CME has a COVID scare, and more.

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Lead Stories

Markets Were Already Braced for Chaos—and Then Came the Diagnosis; Traders worried about the election have been buying hedges against volatility.
Michael P Regan – Bloomberg
The news that President Donald Trump and his wife, Melania, have contracted Covid-19 brings a dizzying array of possibilities for the nation—and the financial markets. It’s the type of uncertainty-inducing event that can act like a gut punch. But in this case, many stock investors were already in a defensive crouch. In options and futures, demand for hedges to protect against sudden bouts of volatility has been strong. Traders say that’s in case Trump refuses to accept a loss in November, a prospect he reinforced in Tuesday night’s debate.

HSBC’s Wild Ride Pushes Hedging Costs to Highest in a Decade
Alfred Liu and Sofia Horta e Costa – Bloomberg
Once one of Hong Kong’s steadiest stocks, HSBC Holdings Plc is now more than three times as volatile as the city’s benchmark. Investors are betting that will continue.
Options traders in Hong Kong are pricing in a volatile October, snapping up both bullish calls and bearish puts on HSBC. The cost of one-month contracts tied to HSBC’s Hong Kong shares has climbed to near the highest since May 2009 relative to those on the city’s Hang Seng Index, according to data compiled by Bloomberg. That indicated high demand to protect against further volatility in the stock.

October Surprises Usually Don’t Turn Out So Bad for Stocks; Presidential elections — and health scares — add to wild rides during the month, but markets tend to finish strong.
Suzanne Woolley – Bloomberg
U.S. President Donald Trump’s positive coronavirus test stirred up more turbulence in stocks, two days into a month infamous for its volatility. Markets around the world fell after Trump tweeted about his test, and the VIX — a volatility index known as Wall Street’s fear gauge — jumped on Friday by the most in a month before paring gains. Even after closing down nearly 1% following a volatile day of trading on Friday, the S&P 500 posted gains of 1.5% for the week.

How Is the Stock Market Doing? The Latest Short-Selling Data Offer a Warning.
Mark Hulbert – Barron’s
There has been a recent uptick in the number of shares sold short that have yet to be bought back—and that’s not good news for the stock market.
Short selling is the practice of betting against a stock by selling shares that one has borrowed in hopes of buying them back later at a lower price. Many on Wall Street consider a higher volume of short selling to be bullish, on the grounds that it represents shares that need to be purchased at some point in the future.

There’s No Place to Hide Anymore When the Stock Market Plunges
James Mackintosh – WSJ
September hurt shareholders, not only because stocks fell but also because the things they’d bought to protect their portfolios also fell. From the S&P 500’s high on the 2nd of the month, stocks, Treasurys, gold, bitcoin and the VIX volatility index all dropped.
This total failure of hedging is unusual, but investors need to get used to the idea that Treasurys no longer provide the ballast for a portfolio.
It wasn’t just the normal pattern of asset returns that broke down. Within the stock market the correction in Big Tech upended many of the reliable ways to minimize losses. High-quality stocks, companies with strong balance sheets and reliable profits, fell by more than the market. Smaller companies beat bigger companies.

Sterling weaker vs euro, focus remains on Brexit
Olga Cotaga – Reuters
Sterling fell against the euro on Monday, although losses were limited as most analysts said they expect Britain and the European Union to soon conclude a Brexit deal. Versus the broadly weaker U.S. dollar, the pound rose.
British Prime Minister Boris Johnson and the head of the EU’s executive, Ursula von der Leyen, agreed in a phone call on Saturday to step up Brexit talks to close “significant gaps” barring a new trade partnership.

Just How Crazy Was September For VIX Traders?
RCM Alternatives
Oil going negative. The Swiss Franc de-pegging from the US Dollar. The Dow losing 1000 points in 36 minutes in the flash crash. These were all outlier events there in plain sight, reported ad nauseum in the financial press. But the largest front month VIX index loss during a down month in the S&P 500 in the past 10 years, that’s not quite front page news for the Wall Street Journal. And, to be honest, it was a bit of a non-event except in the small circle of traders and investors who utilize the negative correlation between the VIX and stock market to structure dynamic market hedges. But in that small circle, September was as crazy of a month as most of them can remember. For those of you who golf, you’ll know that the worst rounds come when you have a “two may miss” going.

Exchanges and Clearing

Singapore Exchange Accelerates Wind-Down of Pact With MSCI
Ishika Mookerjee – Bloomberg
Singapore Exchange Ltd. is beginning to reduce its pact with MSCI Inc. months earlier than expected, citing market uncertainty into year-end to speed up delisting the largest derivatives product it has in partnership with the index provider.
The exchange will migrate all open positions in the MSCI Taiwan Index futures to its newly launched FTSE contracts on Oct. 30 and the MSCI product will then be suspended, Michael Syn, who oversees both the cash equities and equity derivatives businesses, said in an interview. The MSCI product had previously been set to wind down as of the license expiration in February.

Miami International Holdings Reports September 2020 Options Trading Results and New Daily and Monthly Records for MIAX Exchange Group
MIAX Options
Miami International Holdings, Inc. (MIH) today reported September 2020 options trading results for its three securities exchanges – MIAX, MIAX PEARL and MIAX Emerald (together, the MIAX Exchange Group). The MIAX Exchange Group collectively executed over 86.7 million equity option contracts in September for a combined average daily volume (ADV) of 4,129,567 contracts, representing a total U.S. equity options market share of 13.71%.

MIAX Exchange Group – Options Markets – Delisting of E*TRADE Financial Corporation (ETFC)
MIAX Options
E*TRADE Financial Corporation (ETFC) will be de-listed from the MIAX Options Exchange, MIAX PEARL Options Exchange and MIAX Emerald Options Exchange effective on Monday, October 5, 2020.
All GTC orders resting on the MIAX order books in ETFC will be canceled at the close of business on Friday, October 2, 2020.
Additional details about the E*TRADE Financial Corporation (ETFC) merger are provided in the attached OCC Memo.

MIAX Exchange Group – Options Markets – Corporate Action Alert: ServiceMaster Global Holdings, Inc. (SERV) Name and Symbol Change to Terminix Global Holdings, Inc. (TMX)
MIAX Options
ServiceMaster Global Holdings, Inc. (SERV) will change its name and symbol to Terminix Global Holdings, Inc. (TMX) effective on Monday, October 5, 2020.
All GTC orders resting on the MIAX order books in SERV will be canceled at the close of business on Friday, October 2, 2020.
NOTE: TMX options will trade on Cloud 17 on the MIAX Options Exchange and on Cloud 8 on the MIAX PEARL Options Exchange and the MIAX Emerald Options Exchange.
Additional details about ServiceMaster Global Holdings, Inc. (SERV) name and symbol change are provided in the attached OCC Memo.

Effective October 5, 2020 through October 9, 2020, MIAX Options and MIAX Emerald 2X Opening and Intraday Valid and Priority Quote Spread Relief in All Symbols
MIAX Options
Issue Symbol: All Symbols
Multiplier: 2X
Reason: In maintenance of a fair and orderly market.
Time: Opening and Intraday
Subject Summary: Please be advised, effective October 5, 2020 through October 9, 2020, the MIAX Regulation Department has granted 2 times opening and intraday quote parameter relief for all symbols on MIAX Options and MIAX Emerald.

Options Trader Alert #2020 – 27 Nasdaq Announces Changes to the Penny Interval Program, Effective October 2, 2020
Effective Friday, October 2, 2020, all Nasdaq options exchanges, per an industry-wide initiative will add the following issues to the Penny Interval Program:
Additional Issues:
Bigcommerce Holding, Inc (BIGC)
Li Auto Inc.(LI)
Rocket Companies Inc. (RKT)

Eurex Clearing named ‘Clearing House of the Year’ at the GI Investment Excellence Awards 2020
You never get bored of winning, so we are happy to announce that we have again been named ‘Clearing House of the Year’. It’s confirmation of our constant search for – and delivery of – innovative products and solutions for our customers, or as Luke Jeffs, Editor, Global Investor kindly put it: “Eurex Clearing is one of the world’s leading central counterparties, assuring the safety and integrity of markets while providing innovation in risk management, clearing technology and client asset protection. The Frankfurt-based firm clears a broad scope of products under a single framework in Europe, both listed products and OTC, and accepts the world’s most comprehensive spectrum of eligible collateral.”

OCC Clears Record Annual Exchange-Listed Options Volume
Traders Magazine
OCC, the world’s largest equity derivatives clearing organization, announced that September 2020 total cleared contract volume was 670,994,045 contracts, bringing total cleared contract volume to-date to 5,453,292,830 for 2020 and surpassing the annual volume record for the U.S. exchange-listed options industry. The previous record was 5.24 billion cleared contracts in 2018. “This milestone underscores how important clearinghouses like OCC are to financial markets and investors,” said John Davidson, OCC’s Chief Executive Officer. “OCC continues to deliver efficient and effective clearance, settlement, and risk management services to our participating exchanges, clearing member firms, and the users of these vital financial markets.”


Danske quants discover speedier way to crunch XVAs
Mauro Cesa –
Quants at Danske Bank have found a way to greatly speed up calculations for complex derivatives portfolios, such as American options and autocallables, without the need for clunky Monte Carlo simulations. The approach proposed by Copenhagen-based quantitative analysts Brian Huge and Antoine Savine combines two of the most powerful weapons in the modern quant finance arsenal. The first is adjoint algorithmic differentiation (AAD), a mathematical technique that is widely used to calculate sensitivities at high speed. The second is neural networks, a type of machine learning that can find patterns in large datasets.


These Options Terms Are Greek to You; Delta, gamma, theta, vega and rho are among the Greek terms options traders use to describe the sensitivity of an option’s price to various factors. Here is what they mean.
Nick Ravo – WSJ
Options exchanges are racking up records in trading activity this year—thanks to hedge funds’ high-speed algorithms, as well as new individual investors entering the market. Some of these investors are so new, in fact, that they may lack fluency in the language of options.


Save the Date for the Annual Chicago Conference on Futures and Derivatives
Thompson Coburn LLP
Between the pandemic and the resulting financial devastation, the futures and derivatives markets have displayed unprecedented volatility. Add working from home to the mix and compliance has never been more challenging.
In response, we are offering a two-hour webinar on the current state of regulation and enforcement in our industry. At no cost, you can hear from regulators and enforcement attorneys about the latest developments and earn two hours of CLE.
Tuesday, October 20, 2020
1:00 PM – 3:00 PM CST

Law & Compliance Division Conference
7 October 2020 – 9 October 2020 • 9:00 AM – 6:00 PM ET
Our virtual Law & Compliance Division conference (L&C-V) will provide a forum to learn and discuss the legal and regulatory issues impacting the derivatives industry. L&C-V meets the needs of multiple levels of practitioners in the industry, from the new law firm associate to the chief compliance officer. Register today & join us, virtually, 7-9 October to explore recent legal and regulatory precedents affecting the futures, options and centrally cleared derivatives markets.

FIA Legal Opinions Primer
13 October 2020 • 2:00 PM – 3:00 PM BST • Webinar
If you are an experienced user of FIA legal opinions, new to the world of FIA netting and other legal opinions for regulatory capital purposes or just curious as to why FIA maintains a library of legal opinions, please tune in to this FIA webinar where experts from Clifford Chance LLP and FIA will explain the types of legal opinions that FIA maintains, their structure and purpose in the context of regulatory capital requirements. Speakers will also discuss practical aspects of how firms can go about accessing FIA legal opinions, how the legal opinions are reviewed and made available to member and non-member firms. This webinar will focus on the FIA legal opinions procured out of Europe and will not cover the US FCM netting opinions.


Retail Investment: A force for good or evil? Following a surge in retail investment amid increased market volatility and the coronavirus pandemic, Annabel Smith unpacks its potential impact on institutional investors and the trading landscape.
Annabel Smith – The Trade
An isolated population lured in by a string of brokers opting to offer 0% commissions has seen retail investment surge during the coronavirus pandemic. The sudden wave of stay-at-home investors eager to profit from increased volatility has, however, raised concerns as to how retail investors coexist and interact with their institutional brothers and sisters in the market.

(Podcast) Volatility Views 417: Funky VIX, Juicy UVXY and Crazy BBBY
Volatility Views – Options Insider Network

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