JLN Options: Options Week in Review

Mar 28, 2013

ETFs on volatility were big news this week. Brendan Conway reported in Barron’s that a couple of relatively new low volatility ETFs are getting bigger returns than the S&P 500, which hit a record high on Thursday. The most widely-owned fund, PowerShares S&P 500 Low Volatility Portfolio (SPLV), got over $790 million from investors this year, according to research firm XTF. The No. 2 fund, iShares MSCI USA Minimum Volatility Index Fund (USMV), received $1.7 billion in new money. The funds entered Thursday’s session up by 12.1% and 12.5% respectively. 

In an earlier article, Conway pointed out that Nikolaj Gammeltoft and Cecile Vannucci of Bloomberg News noticed an interesting “disconnect” between the historically low levels of the VIX index and the heavy trading in the much more volatile VVIX index. The VVIX index tracks the price of options built on the volatility index itself – the volatility of volatility. According to Gammeltoft and Vannucci, the divergence between the two gauges shows increased speculation that the VIX is poised for a rebound. Traders buying options on volatility think that when the S&P 500 Index starts seeing losses, they will be rapid.

Gammeltoft and Cecile Vannucci also reported that more than $520 million flowed into two leveraged volatility ETFs this quarter: the ProShares Ultra VIX Short-Term Futures ETF (UVXY) and VelocityShares Daily 2x VIX Short-Term ETN (TVIX).  Those are the largest flows in a year. The index is tracked by the Barclays iPath S&P 500 Short-term VIX Futures ETN (VXX), which has received even more money at $620 million. These leveraged ETFs are being used to bet that what is now taking place in Cyprus may spread throughout Europe. But when no crisis erupts, the value of these products goes down, Barron’s reported.

BATS Global Markets has begun publishing rankings of 12 national stock exchanges by measures of “market quality,” Traders Magazine reported. BATS is ranking the exchanges by how narrow the effective spreads are between the best bids and offers on orders executed across all exchanges.

Traders Magazine also reported that the adoption of a new pricing model by the C2 Options Exchange appears to have been successful, as C2’s market share grew to more than 2% last week, it’s highest level ever.  The price change from maker-taker to taker-maker was designed to encourage inbound retail liquidity flow.

Banks are beefing up their FX options desks in response to rising volumes in FX options, which correspond to a pick-up in the spot FX market and strong trends in the major currencies, Reuters reported. These trends mean money-making opportunities for hedge funds and incentivise corporate investors to hedge their exposure. Banks are expanding into FX options as options volumes in general are up about 40 percent from last year.

Options investors were paying more for bearish bets on Apple Inc after its steady slide downward. Apple stock had fallen 35.5% since its peak of $702.10 on Sept. 19, 2012, according to Reuters. This loss occurred as the S&P 500 Index gained almost 6% in the same period.

JLN Options will not be published on Friday.  It will resume on Monday.

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