Observations & Insight
EDITOR’S NOTE: JLN Options is happy to have Henry Schwartz, President of Trade Alert, as a guest editor this week.
Complex orders (continued)
Henry Schwartz – Trade Alert
Yesterday we noted the steady growth option volume coming from complex orders, which now accounts for about 1/3rd of daily flow. Today’s chart shows November volume stats from the largest complex order books, and includes a snapshot of which types of spreads were the most common in yesterday’s session. (Click the image below for a larger display.)
As many would expect, simple vertical call and put spreads lead the volume, while Friday’s quarterly expiration will boost calendar and diagonals activity as the week progresses. An honorable mention goes to some good-sized collars trading in some of the names that have seen significant post-election gains. Bank of America, for example, saw nearly 30K zero-cost collars opened this morning with very flat skew providing near symmetrical 11% out-of-the-money protection in exchange for upside.
By One Measure, Traders Are the Most Bullish on Stocks Since at Least 1997
Julie Verhage – Bloomberg
This equity rally has legs. At least that’s the signal coming from the options market, where one metric suggests that traders haven’t been this optimistic about what’s to come in almost 20 years. The price of call options that bet on a 10 percent rise in the S&P 500 Index are at the most expensive on record relative to at-the-money contracts in data going back to 1997, according to a note from Credit Suisse Group AG. And the optimism isn’t just confined to the index itself.
***HS: Any way you slice it, current put/call skew (steepness of the volatility ‘smile’) is the flattest level in years.
CME prepares to close New York options trading floor
Luke Jeffs – Futures & Options World
Merc said in April the New York trading floor would close at the end of December
CME Group has changed its trading rules to reflect the imminent planned closure of its New York-based trading floor, one of the world’s last open outcry trading facilities. The Chicago-based group told members on Monday the new trading rules will take effect on January 3 after the New York trading floor is closed on December 30.
Hedging Is an Afterthought for Traders With S&P 500 Near Record
Joseph Ciolli – Bloomberg
Fresh off three straight record closes and with call volume at all-time highs, options traders are adding to bullish bets on the S&P 500 Index. They’re paying the least since July 2014 to protect against a decline in the SPDR S&P 500 ETF Trust before Wednesday’s Federal Reserve rate decision.
***HS: Does anyone hedge if they are underperforming the broad market?
Tweeter-in-Chief Trump Faces Test After Yellen’s Rate Decision
Christopher Condon – Bloomberg
If you’re looking for drama surrounding this week’s meeting of Federal Reserve officials, don’t look for it in their post-meeting statement. Policy makers are almost universally expected to raise their benchmark lending rate. Keep an eye, instead, on President-elect Donald Trump’s Twitter feed.
Bullish Trading of S&P 500 Options Hits Record Amid Rally
Gunjan Banerji – WSJ
On the heels of all-time highs in U.S. stocks, the options market is charging ahead with a bullish outlook. U.S. stock benchmarks closed Friday at records, with the S&P 500 index capping its best week since Nov. 8. The rally in equities spurred bullish options trading on the S&P 500.
***HS: Record volume in SPX calls two days in a row- notional value traded Friday was near $364 billion!
Even Before Brexit, London Lost Its Status as Derivatives Center
Will Hadfield – Bloomberg
As London’s financial industry braces for Brexit, a new report shows the capital has already lost its leadership in at least one key market. New York has now eclipsed the city as the biggest center for off-exchange derivatives trading.
Exchanges and Clearing
LCH sees international clearing and compression plan coming together
Futures & Options World
LCH has made great strides establishing its services as a core part of the market infrastructure in Asia
LCH has emerged in recent years as the one of the brightest assets in the LSE Group and in 2016 it saw its Asian business pick up dramatically as it was recognised in some of the region’s key markets. Daniel Maguire, global head of rates and foreign exchange derivatives at LCH, told FOW the firm is now truly global, in part due to its regional base in Sydney, which effectively opens the LCH trading day and manages its business in the region.
Tred Talks: Central counterparties in 2016
Securities Lending Times
Tred McIntire, formerly head of Goldman Sachs Agency Lending and a member of the RMA executive committee, gives h is thoughts on how central counterparties in the securities lending market have evolved so far
Euronext confirms departure of Maria Joao Carioca as CEO of Euronext Lisbon
Euronext today confirms that Maria Joao Carioca, CEO of Euronext Lisbon and member of the Managing Board of Euronext, has resigned after being asked by the Government of Portugal to join the Management Board of Caixa Geral de Depósitos.
CME Group Announces 2017 Annual Meeting Date
CME Group Inc. (NASDAQ: CME), the world’s leading and most diverse derivatives marketplace, today announced that its 2017 Annual Meeting of Shareholders will be held at 10:00 a.m., Central Time, on Wednesday, May 24, 2017, in the Auditorium at CME Group, located at 20 South Wacker Drive, Chicago, Illinois.
Regulation & Enforcement
Nasdaq Stockholm, Clearing Fined by Swedish Regulator for Lax Security
Jeff Patterson – Finance Magnates
There presently exists a wide disparity in the levels of security and risk management deployed at institutional venues amidst a rising specter of cyber crime. Unfortunately, not all groups take this threat seriously, as Nasdaq Stockholm and its derivatives clearing operation found itself facing a Skr55 million ($6.0 million) fine for lax security measures.
SEC Chair White defies Republican requests to stall rulemaking
Sarah N. Lynch – Reuters
U.S. Securities and Exchange Commission Chair Mary Jo White on Monday defied requests by Senate Republicans to delay adopting new rules on everything from derivatives to mutual funds until after President-elect Donald Trump takes office.
Analysis: Traders Still Have the Power to Influence the FCA
Victor Golovtchenko – Finance Magnates
Last week a number of regulators across the European Union announced their opinions regarding ESMA’s take on the retail foreign exchange and CFDs trading market. Several national regulators across the continent have issued communiques to companies from the industry regarding forex, CFDs and binary options trading.
FX Feeds’ Sudden Evolutionary Leap
Joanne Faulkner – WatersTechnology
Over-the-counter asset classes have a reputation of opacity, illiquidity, voice-brokered trades and wide spreads, but foreign exchange has long been treading a path toward electronification. Now, market forces and the availability of data and technology are kicking these efforts up a gear.
Symphony looks to Asian expansion with CEO move, new investment
Anna Irrera and Olivia Oran – Reuters
Symphony Communications Services LLC is relocating its chief executive to Singapore and targeting Asian investors as it looks to expand its Wall Street chat technology into the region.
***HS: Interesting move as Symphony takes on Bloomberg and quasi-public platforms operated by CME and ICE.
NovaSparks Market Data Coverage Tops 50 Feeds
Business Wire via Yahoo Sports
NovaSparks, the leading field programmable gate array (FPGA) market data company, today announced that it has significantly expanded the market data coverage of NovaTick, its flagship ticker plant product. The Company added 10 markets across Japan, Australia, Hong Kong, Northern Europe and Canada in the last five months. The rapid expansion of NovaTick’s feed coverage further ensures that banks and trading firms do not have to compromise coverage for performance. Compared to traditional software solutions, NovaTick is five to 10 times faster on average, and 50 to 100 times faster during traffic peaks.
****SD: Will Yahoo ever figure out that their automated posting process puts trading/markets/finance-related releases in Yahoo Sports?
Is S&P Sentiment Really That Optimistic? Yes
Technicals: We’re within the FOMC drift period, December is a seasonally strong month, and the short-term trend of the S&P is up.
Sentiment: CBOE’s total put/call ratio has plummeted, the NAAIM Exposure Index is elevated, and the VIX futures curve is in steep contango.
Rates: High yield spreads contracted and the Treasury yield curve steepened.
Macro: The unemployment rate is back below its long-term trend, the housing market is strong, ISM PMI is north of 50 and retail sales are up over the last year.
Stocks Just Did This For the First Time In 2 Years
Andrea Kramer – Schaeffer’s Research
Although the S&P 500 Index (SPX) just snapped its longest winning streak in two years, the broad-market barometer has been on a quest for record highs, hitting all-time intraday peaks in each of the past five sessions (including today). As such, 30% of optionable S&P stocks have notched 52-week highs in the past 10 trading days — a signal not sounded since 2014. If history is any indicator, stocks could experience some weakness over the next month, but stronger-than-usual upside three months from now.
Rotation Has Analysts Re-Rating Stocks, Just Not as Expected
Cormac Mullen – Bloomberg
The rotation from defensive stocks into cyclicals is leading analysts to re-rate European companies, but not always in the direction you might expect.
Minimum Variance Delta Hedging
John Hull and Alan White – FINCAD Blog
Delta is by far the most important Greek letter when portfolios of derivatives are being managed. It measures the sensitivity of the value of a portfolio to small changes in the value of the underlying asset. Delta can be adjusted in a straightforward way by trading the underlying asset. Option traders are subject to delta limits and must usually ensure that their delta exposure is within these limits at the end of each day. Sometimes limits are expressed in terms of the equivalent dollar position in the underlying asset. Suppose a derivatives dealer has a delta limit of $100,000 when the asset price is $50. This means that delta must be between – 2,000 and +2,000. A small change [delta]S in the value of the underlying asset must lead to a change of less than 2,000[delta]S in the value of the portfolio.
2016: A rollercoaster year for foreign exchange
Farah Khalique – Euromoney Magazine
2016 will be remembered as the year the people punished politicians at the polls, unleashing a torrent of volatility in financial markets, with currencies taking a huge hit. Here are the biggest currency stories of 2016.