Options Market Is Skeptical About High-Yield Bonds; OCC plans minimum cash contributions to clearing fund; German-Russian man admits to Dortmund team bus bombing

Jan 8, 2018

Observations & Insight

The Spread – Week of 1/1/18


A new year, a new Spread! The Spread is a brief recap of some of the notable activity in the options world.

The following are stories referenced in this week’s episode of The Spread:

Watch the video here »

Lead Stories

Options Market Is Skeptical About High-Yield Bonds
Gunjan Banerji – WSJ
The high-yield bond market could be in for some turbulence.
Among 30 exchange-traded funds analyzed by Goldman Sachs, options investors are the most bearish on the high-yield sector and the most bullish on oil for 2018.
Across all the ETFs, Goldman found that an options measure called skew was the highest in the iShares iBoxx $ High Yield Corporate Bond ETF, or HYG. The gauge, which measures the cost of protecting against share declines, is currently sitting at a one-year high, Trade Alert data show.

OCC plans minimum cash contributions to clearing fund
Julie Aelbrecht – Global Investor Group (SUBSCRIPTION)
The Options Clearing Corporation has proposed changing its rules to include a minimum cash requirement for its clearing fund.
The Options Clearing Corporation (OCC) has filed with US derivatives regulator to install a minimum cash requirement for its clearing fund, requiring that clearing members collectively contribute $3 billion in cash to the fund.

****SD: The full CFTC filing can be found here. This new $3b proposal comes from the OCC performing “an analysis of its stress liquidity demands based on a 1

-in-70 year hypothetical market event.” The OCC found that “peak stressed liquidity demands of the largest 1 or 2 members, which normally occur in conjunction with certain monthly expirations, can exceed the size [of] OCC’s committed liquidity facilities.”

German-Russian man admits to Dortmund team bus bombing
A German-Russian man admitted Monday to carrying out a bomb attack on the Borussia Dortmund football team’s bus in an elaborate bid to make a fortune on the stock market.

****SD: Recall this crazy options ploy: buy a bunch of puts on Dortmund stock (it’s the only German soccer club listed on the exchange), bomb the team bus, profit from ensuing chaos. But the stock didn’t plunge very much, so the bomber’s profit was 5900 euros. Yeesh. And listen to this little bit from the aftermath of the bombing: “W. reportedly drew attention at the hotel, first by insisting on a window room facing the front and then, in the chaos after the blasts, by calmly walking into its restaurant to order a steak.”

The Least Dumb Way to Short the VIX
Crystal Kim – Barron’s
Shorting volatility was a winning strategy in 2017 with the Cboe Volatility Index inactive for most of the year. The VIX started the year at the 12 level and averaged 11 for the year. Meanwhile, the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) gained nearly 190 percent.

****JB: The article mentions “The Hitchhiker’s Guide to Shorting Vol.” I wonder if part of it is knowing where your towel is (to some readers that will make perfect sense; to others none at all). Bloomberg has the story too – Macro Risk Advisors Reveals the ‘Best’ Short-Volatility Strategy

Barclays Expected to Replace Maturing VIX ETNs
Max Chen – ETF Trends
In anticipation of the popular CBOE Volatility Index or VIX-related exchange traded notes maturing next year, Barclays, the underwriting bank behind the iPath ETN line, is expected to launch a pair of “Series B” ETNs to keep on the VIX exposure.

****SD: In case you missed it last week – the solution to Barclays’ VIX ETN expiration.

Weekend Review of VIX Futures and Options – Jan 6 2018
Russell Rhoads – Cboe
The S&P 500 gained 2.6% to begin 2018. VIX and the VIX futures curve reacted as one would expect with a dramatic drop in spot VIX and the futures following suit to a lesser extent.

****JB: Also see: Weekend Review of Volatility Indexes and ETPs and Weekend Review of Russell 2000 Options and Volatility

Exchanges and Clearing

Nasdaq ISE Seeks to Up Access Fees
Options exchange operator Nasdaq ISE has filed a request with the US Securities and Exchange Commission to raise non-transactional fees on its primary and competitive market makers to offset increasing overhead costs.

CME Group expands private trades in grain markets, raising worries
Tom Polansek – Reuters
Exchange-operator CME Group Inc will allow a type of privately negotiated transaction in all its agricultural markets for the first time on Monday, splitting traders who predict the move will either improve or hurt transparency.
The company, which owns the Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange, will expand the use of transactions called block trades in its grain and livestock futures and options, such as corn. It already permits the trades in other markets ranging from Black Sea wheat to Eurodollars.

Nine Charts Highlight Nine New Records for Cboe Index Products in 2017
Matt Moran – Cboe
A number of new volume and price records were set for Cboe index products in 2017, as customer demand for index options and volatility product solutions continued to grow.
These records were remarkable in light of the fact that many experts said that that the markets appeared to be very complacent, as the Cboe Volatility Index (VIX) hit a record low in 2017.

Hong Kong Exchange Eyes New Trading Rules to Spur Volume
Benjamin Robertson and Andrea Tan – Bloomberg
Hong Kong Exchanges & Clearing Ltd. is considering rule changes aimed at increasing trading, according to Chief Executive Officer Charles Li.
Rebates to market makers, simplified rules for using collateral across multiple positions, and the removal or reduction of stamp duty charges are among measures being considered, Li said in an interview. Some of the changes will require approval from the securities regulator or government, he said.

Thomson Reuters December FX trading volume highest since at least 2013
Currency trading on Thomson Reuters platforms in December topped $392 billion, the highest for that month since at least 2013, as trading in derivatives soared, the company said on Monday.

LCH hits swap clearing records amid Brexit noise
Helen Bartholomew – Reuters
London-based LCH cleared a record US$873trn of over-the-counter derivatives notional in 2017, as the introduction of new products and the rising cost of bilateral exposures overcame uncertainty around the clearinghouse’s future as the UK negotiates its departure from the European Union.

Regulation & Enforcement

Global derivatives industry rolls out Brexit back-up plan
Huw Jones – Reuters
The global derivatives industry has begun work on fundamental changes to cope with a “hard” Brexit by allowing any disputes involving trillions of euros of swaps contracts to be resolved under French and Irish law.

NFA Adopts Notice Requirements for CPOs and CTAs That Trade Virtual Currency Products
Sidley Austin – Lexology
On December 14, 2017, the National Futures Association (NFA) issued reporting requirements (Reporting Requirements) obliging any NFA member commodity pool operator (CPO) or commodity trading advisor (CTA) to notify the NFA immediately once it has executed a transaction involving any virtual currency transaction or virtual currency derivative (including futures, options or swaps) on behalf of a commodity pool or a managed account. The adoption of the Reporting Requirements follows recent announcements by various futures exchanges and swap execution facilities regulated by the Commodity Futures Trading Commission (CFTC) to offer derivatives on virtual currency products. The NFA pointed to the volatility of the underlying virtual currency products as justification for the new requirements.

After Self certification Begins, Bitcoin Futures Set for CFTC Scrutiny
John D’Antona Jr. – Traders News
After the Chicago Mercantile Exchange Inc. (CME) and the CBOE Futures Exchange (CFE) self-certified new contracts for bitcoin futures products, and the Cantor Exchange (Cantor) self-certified a new contract for bitcoin binary options, the Commodities Futures Trading Commission is now going to hold hearings on the crypto and crypto-futures markets.


Don’t Trust Dow 25000. The Economic Cycle Is Broken
James Mackintosh – WSJ
The economic cycle has been turned upside down. Depending where you look, there is strong evidence that the U.S. is in the first stage of recovery, in a long mid-cycle, or even approaching the final stages before rolling over.

New year, new highs for zinc as market tightens further
Andy Home – Reuters
inc has started the new year with a bang, hitting a fresh 10-year high of $3,380 per tonne in the first week of trading on the London Metal Exchange (LME).

The UK’s Crisis of Confidence Was Years in the Making

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