Oil Going Back Below Zero? There’s an Option for That Now; How hedge fund shorting triggered the USO’s epic AUM growth

Apr 23, 2020

Observations & Insight

Angelo Evangelou: SA-CCR Early Greenlight a Great Step in the Right Direction

The SA-CCR is an expansive set of rules that applies to more than just the options markets, but Angelo Evangelou, Cboe’s chief policy officer, explained why Cboe is excited about the change and optimistic about its potential impact on the options markets.

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Lead Stories

Oil Going Back Below Zero? There’s an Option for That Now
Alex Longley and Dan Murtaugh – Bloomberg
Oil options traders will now be able to buy and sell contracts with values below zero, after announcements from the two biggest exchanges.
Intercontinental Exchange Inc. said it will soon allow for the listing of options contracts with strike prices that are negative. It follows a similar recent announcement from CME Group Inc. that it would make negative options available on West Texas Intermediate and other oil contracts as of Wednesday’s close.

**** JB: More detail on this can be found in the “Exchanges” section below.

How hedge fund shorting triggered the USO’s epic AUM growth
Izabella Kaminska – The Financial Times
ETFs, ETNs and ETPs are among the most shorted instruments in the market, with short interest regularly hitting double-digit percentages and in some unique cases triple-digit percentages.
Among the reasons they are so popular for shorting is their convenience and low cost, especially compared to alternatives like futures or options. Other advantages include the fact they are not subject to the uptick rule, which can bring trading advantages (or so we are told).

Negative Oil Prices in Dated Brent Are More Troubling Than WTI
David Fickling – Bloomberg
The best argument for taking a sanguine approach to oil prices collapsing into negative territory this week is that it’s strictly a local problem.
As my colleague Matt Levine has written, once you unpack what “oil prices” means, the bizarro-world implications of negative pricing aren’t so mysterious. It’s common to talk about West Texas Intermediate crude oil priced at Cushing, Oklahoma as if it’s a proxy for the oil market as a whole, but that’s never been the case. The world’s twin oil supply and demand shocks have made the shortage of storage and pipeline capacity at that specific location so acute that producers are prepared to pay to get their place in the queue. That need not have wider implications.

JPMorgan reveals 3 reasons the oil crash won’t create systemic risk for markets
Ben Winck – Markets Insider
Recent turbulence throughout the global oil market isn’t likely to hit risk assets as hard as past commodity shocks, JPMorgan said in a Wednesday note.
Markets look “tame” after West Texas Intermediate oil contracts reached negative prices for the first time ever on Monday, said John Normand, head of cross-asset strategy at the bank. The commodity market’s volatility skyrocketed to 1,400% this week as a storage squeeze and historically weak demand left traders with nowhere to keep oil scheduled for May delivery.

Surviving Crypto Volatility With Derivatives Contracts
Pankaj Balani – CoinTelegraph
Volatility has been the dominant theme in financial markets lately. As uncertainty around COVID-19 and its impact on the economy deepens, markets have been swinging wildly. We’ve seen the S&P 500 falling off a cliff as well as risk assets across the board taking a beating. Cryptocurrency markets have been no different and have exhibited extreme volatility. Amid the pessimism, Bitcoin (BTC) broke below the $4,000 mark on Black Thursday and fell nearly 50% from recent highs.

Marex puts trading restrictions on oil futures after market rout
Philip Stafford, Neil Hume and David Sheppard – FT
Marex Spectron, the commodities broker, will restrict many of its customers from taking new positions in oil futures contracts expiring in June as well as raising its margin requirements, in a move to insulate itself and its clients from further wild swings in prices. The London-based group, which has grown quickly since the last financial crisis under the stewardship of a group of former Lehman Brothers bankers, told clients it was taking the action after seeing “extreme stress” in futures trading. INTL FCStone, a New York-based broker, has also told smaller clients not to place new trades in the same contracts.

Exchanges and Clearing

Switch to Bachelier Options Pricing Model – Effective April 22, 2020
To Clearing Member Firms; Chief Financial Officers; Back Office Managers From CME Clearing
CME Group
Pursuant to Clearing Advisory 20-152 that was published on April 8th, the clearing house will switch the options pricing and valuation model to Bachelier to accommodate negative prices in the underlying futures and allow for listing of option contracts with negative strikes for the set of products specified in the link below. The switch will be effective for the margin cycle run at the end of trading tomorrow April 22, 2020 and will remain in place until further notice.

*****JJL: This was a notice from the CME on April 21. I think this is something the industry and the greater public need to understand better what it means. I would like to invite interested parties to participate in a Zoom panel discussion about this. I will moderate and I would like three or four panelists. Contact me at johnlothian@johnlothian.com if you are interested in participating, or even sponsoring.

ICE ready to switch model for Brent oil options if prices go negative
Julia Payne – Reuters
Brent crude oil options are not currently set up to settle at negative prices but the Intercontinental Exchange (ICE) that operates the contract is ready to switch pricing models if necessary, ICE said.
“We currently use Bachelier to settle Brent Calendar Spread Options and other options products where the underlier can trade at negative prices,” a spokeswoman for the ICE said in a statement.

CME Globex Notices: April 20, 2020
CME Group


Market ructions test faith in classic portfolio mix
Robin Wigglesworth – The Financial Times
One of the basic rules of investment is coming unstuck, forcing some fund managers to rethink how they build their portfolios.
For much of the past century, the building blocks of most investment portfolios have been a combination of riskier stocks and steadier, safer bonds. Like a see-saw, one typically rises if the other falls, smoothing returns and offering a hedge.

Big investors haven’t capitulated yet, so be wary of this market, warns SocGen strategist
Barbara Kollmeyer – MarketWatch
Can stock markets push through more bad news?
U.S. jobless claims revealed millions more have been forced out of work due to the coronavirus crisis, while we started the day with bleak Europe purchasing managers index (PMI) data.
So far, markets are just treading water, but the runup has been impressive since last month’s rout. The S&P 500 SPX, 1.01% has rallied about 25% since March 23, sparking endless debate about the sustainability of those gains against the continuing fallout from the virus, with the Nasdaq Composite COMP, 1.02% still in the lead year-to-date.


Moonlighting in FX Beats Netflix Binges for Some Stuck at Home
Chikafumi Hodo and Daisuke Sakai – Bloomberg
The coronavirus pandemic is fueling a boom in retail currency trading, with some discovering that working from home means they can moonlight in the market during the daytime.
Virus-related shutdowns have reshaped the way that millions around the world make a living and have also provided impetus for all sorts of at-home activities from binge-watching programs on Netflix to learning new skills. At the cross-roads of that is retail wagering on currency markets, especially in Japan.

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