Options Being Used More for Speculation Than Traditional Hedging; Options investors swarm U.S. value stocks on hopes of economic reopening

Dec 11, 2020

Observations & Insight

$18,761/$300,000 (6.3%)
Anthony McCormick, Rob Moore and Jennifer Nayar


We had three new donations to the JLN MarketsWiki Education GoFundMe campaign. Tony McCormick of BOX, Robert Moore of Marquette Partners and Jennifer Nayar of Vela all gave to our campaign to preserve industry history. Tony McCormick is a friend of JLN who has played many roles in the industry, including at Schwab and at BOX. He is now the head of BOX Exchange LLC, having previously served as CEO of BOX Options Markets LLC. Rob Moore is a friend of JLN, veteran trader and general partner of Marquette Partners, an international liquidity provider to exchange-traded markets. Marquette Partners has been a loyal Friend level sponsor of MarketsWiki. We interviewed Rob back in 2011 for our History of Financial Futures project that helped spawn our history preservation efforts. Jennifer Nayar is the CEO of Vela and one of the highest profile female technology leaders in the industry. Her resume features impressive stops at REDI Global Technologies, NYSE Euronext, NYFIX Inc, Omgeo, Mercator (formerly Braid), Thomson ESG, and the London Stock Exchange. Vela is also a loyal Friend level MarketsWiki sponsor.

Lead Stories

Options Being Used More for Speculation Than Traditional Hedging
Gregory Calderone – Bloomberg
Patterns in options trading are confirming the suspicion that retail investors are largely behind the shift in how options are being used, which has partially helped the stock market recover from its Covid-19 selloff in March.
While traditionally a tool that fund managers have used to hedge their portfolios, it now appears options are being used more for speculative bets on the price of the underlying shares by retail investors. A surge in trading of small lots of options this year has been linked to the growing number of individuals who got involved in the market amid the Covid-19 lockdowns.

Options investors swarm U.S. value stocks on hopes of economic reopening
April Joyner – Reuters
Retail investors are stepping up their options buying, pouring money into airlines, small caps and other potential beneficiaries of a COVID-19 vaccine even as U.S. stocks hover near record highs.
Volume on call options, which are typically used to position for gains in stocks, is at its highest since early September, according to Deutsche Bank. Much of the activity has come in the form of small-lot purchases on individual stocks, a hallmark of retail investor activity, analysts said.

Johnson and EU Warn of No Deal as Deadline Nears: Brexit Update
Ian Wishart and Christian Wienberg – Bloomberg
Prime Minister Boris Johnson and European Commission President Ursula von der Leyen both warned that a no-deal Brexit is looming on Dec. 31 as they continued last-ditch talks to try to reach a deal before Sunday.
Johnson said on Friday that a no-deal Brexit at the end of the year now looks “very, very likely.” His pleas for European Union leaders to step in and salvage the faltering negotiations were frustrated as summit talks overran on Thursday night, pushing Brexit to the fringes. On Friday, von der Leyen spent just 10 minutes briefing government leaders on the subject.

*****JB: I feel like we’ve been here before.

Brexit poses threat of ‘market volatility and disruption’, BoE warns; UK central bank’s financial stability report says EU-based investors face risk to transactions
Matthew Vincent – FT
Ending the Brexit transition period without an agreement on financial services risks “volatility and disruption”, the Bank of England has warned, adding that it may have to intervene to keep markets operating smoothly as it did at the height of the pandemic in March.

Brexit could disrupt $200 billion in derivatives trading, BoE says
Huw Jones – Reuters
Derivatives trading worth $200 billion a day faces disruption from European Union curbs and customers too slow to move business from London before full Brexit, the Bank of England said on Friday.
Britain’s access to the EU in financial services is being dealt with by Brussels separately from stalled negotiations that increasingly point to a no-deal Brexit on Dec. 31.

BoE has limited power to calm market after Brexit transition: Bailey
Governor Andrew Bailey said on Friday there was a limit to the Bank of England’s ability to avoid all disruption or volatility in financial markets after Britain’s Brexit transition period with the European Union ends on Dec. 31.

Why Traders Are Taking a No-Deal Brexit Threat In Their Stride
Jill Ward and William Shaw – Bloomberg
With just three weeks to go, Britain is hurtling toward a no-deal Brexit and yet markets are decidedly sanguine on the looming economic shock.
It’s a scenario that few imagined a year ago. Helped by dollar weakness, the pound isn’t far from the highest in two years and the FTSE 250 Index is down just 3% this week. The spread between French and Irish debt, a gauge of Brexit anxiety, is the narrowest since September.

Exchanges and Clearing

Volatility Trading Through The End Of The Post-Brexit Transition Period
The Brexit process continues with the next big deadline coming on December 31 when the post-Brexit transition period comes to an end. There is a lot of uncertainty as to what the end of this temporary normalcy will bring. The financial impact of moving to the next phase of Brexit will be felt most in Europe and no other index will reflect the market’s concerns or relief associated with this process than VSTOXX. Trading VSTOXX futures and options through the end of the post-Brexit transition period will offer up opportunities for those expecting elevated volatility to drop with a smooth transition or if the end of the transition period will bring more uncertainty and an increase in VSTOXX.

MIAX and MGEX Announce SPIKES Futures December 14 Relaunch
Miami International Securities Exchange, LLC (MIAX) and the Minneapolis Grain Exchange (MGEX) today announce the planned December 14 relaunch of futures on the SPIKES Index (SPIKES Futures) on MGEX via the CME Globex platform.

Micro E-mini Equity Options Surpass 500,000 Contracts Traded
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, announced that more than 500,000 options on its Micro E-mini S&P 500 and Micro E-mini Nasdaq-100 futures contracts have traded since launch on August 31.

Cboe Global Markets Announces Date of Fourth-Quarter 2020 Earnings Release and Conference Call
Cboe Global Markets, Inc. (Cboe: CBOE), a market operator and global trading solutions provider, today said it will announce its financial results for the fourth quarter of 2020 before the market opens on Friday, February 5, 2021. A conference call with remarks by the company’s senior management will begin at 7:30 a.m. Central Time (CT), 8:30 a.m. Eastern Time (ET).

Regulation & Enforcement

The Exchange proposes to add options on the Mini-Russell 2000 Index (“Mini-RUT” or “MRUT”) to its P.M. Pilot Program.


Fed ‘Manipulation’ Crushes Can’t-Miss Trade in U.S. Bond Market
Vivien Lou Chen – Bloomberg
The Federal Reserve is casting a long shadow over the world’s biggest bond market, derailing a classic recovery trade and underscoring how an era of central-bank intervention will reverberate for some time to come.
The mere hint that the Fed may take additional steps to hold down long-term rates is causing Treasury traders to scale back so-called steepener bets — a tried-and-true strategy that has generated big profits over the years as economic rebounds pushed yields higher. Barclays Plc is keeping a lid on the size of its positions. Incapital is using options, rather than actual bonds, for a hedged — and more cautious — riff on the trade. And Nick Maroutsos of Janus Henderson Investors says some “could get flattened” by the wager.

Oil Volatility Continues To Drive Demand In 3X US Oil Exchange Traded Products
Spencer Israel – MarketWatch
Due to the uncertainty that COVID-19 was going to have on the global economy in general, and crude oil specifically, West Texas Intermediate (WTI) front-month futures contracts closed at a negative price in April 2020. WTI represents the price for future delivery of a barrel of WTI crude oil. Since June 2020, WTI front-month futures contracts have traded between $34-$43 per contract. As of December 2020, WTI closed above $46 for the first time since early March 2020.


2020 Annual Trends in Futures and Options Trading
27 January 2021 • 10:30 AM – 11:30 AM ET • Webinar
This webinar will highlight the main trends in trading activity in 2020 in the global exchange-traded derivatives markets, with category and regional breakdowns as well as exchange and contract rankings.
Moderator: Will Acworth, Senior Vice President of Publications, Data & Research, FIA


When the Stock Market Is Too Much Fun
Jason Zweig – WSJ
Technology can make investing easy and fun. It can also downplay risk in ways that may lead novices astray.
In last week’s column, I described my experience on the popular Robinhood brokerage app, especially how trading became hard to stop once I started. Now let’s look at how Robinhood may encourage risky behaviors that could backfire.

(Podcast) OB 958: Talking NIO, VIX, TSLA, AAPL, FB, LULU, ADT and More
Option Block – Options Insider Network

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