JLN Options: Options Week in Review

Apr 18, 2013

A recent Tabb Group report found that high-frequency trading is dominating US options trading, and that keeping up with the pace of technology in a climate of tight budgets and low trading volumes is becoming too difficult for many firms.  The industry is transforming as smaller “mom and pop” market making firms disappear.

The CBOE VIX, known as the “fear index,” is up 30% this month, but a chart shows that longer maturities through September have barely budged, leading Susquehanna Financial Group’s Chris Jacobson to conclude that the VIX spike is just a blip rather than a longer term trend, according to Barron’s.

Nicholas Colas, chief market strategist at ConvergEx, argued the VIX would be double where it is “if these were normal times,” MarketWatch reported. Colas said it is puzzling that the VIX ended Tuesday at 14, one standard deviation below its long term average of 20, given that in the past month there has been a terrorist attack in Boston, economic trouble in Cyprus, a gold market crash, and continued U.S. borrowing. He suggested that investors who think the VIX will revert to its long term mean should buy any instrument that will profit from a rise in expected volatility over the next few months. Or, alternatively, investors should think about what might depress the VIX for an unusually lengthy period.

Traders of ETFs and ETNs that track volatility in U.S. stock saw the biggest gains since February as equities fell. The Barclays iPath S&P 500 VIX Short-Term Futures exchange-traded note (VXX) jumped 12 percent to $20.52 and the ProShares Ultra VIX Short-Term Futures ETF (UVXY) soared 23 percent to $7.75, according to Bloomberg. At the same time, the S&P 500 Index dropped 2.3 percent to 1,552.36 and the CBOE VIX was up 43 percent. The trading was mostly from participants speculating on equity losses and protecting their profits, Bloomberg said.

One options trader who took a position on the expectation that the VXX would continue to drop realized a 229% profit on Tuesday despite the drop in U.S. stock and gold prices Monday, the Wall Street Journal reported. The trader used a put butterfly spread that looked for the VXX ETN to drop more than 6.5% over six weeks. The original trade was made on March 7.

A study for Reuters by Schaeffer’s Investment Research showed that options trading activity ahead of news of takeovers, major investments or big stock repurchases occurs regularly. The survey found 41 examples of companies, or 23 percent of the sample, where the volume of new call options positions rose by at least 50 percent in the five days before the news, compared with the average of the previous six months. The volume more than doubled in 33 of the companies.

With the plunge in gold on Monday, the CBOE’s gold volatility index spiked to 34.48 compared to its year-to-date average of 14.25, as investors dumped synthetic products or covered longs, and dealers hedged exotic derivatives, IFR reported.  The options market also had a role in bringing gold prices down, as hedge funds who were long gold bought puts to protect themselves from losses. The dealers then had to sell gold to hedge their positions, creating a “downward spiral.”

The Chicago Board Options Exchange reported an all-time single day volume record in the VIX on April 15.  Options volume totaled 1,399,863 contracts, beating the previous record of 1,388,634 contracts traded on February 26, 2013.  The CBOE Futures Exchange VIX futures set an all-time single day high as well, trading 449,955 contracts, beating the previous record of 302,278 contracts traded on February 25, 2013.

Montreal Exchange Inc. (MX), a subsidiary of TMX Group, announced Friday that it was raising position limits for its equity and exchange-traded fund options, effective immediately, as part of its strategy to expand the Canadian options market, Investment Executive reported.

John Lothian Newsletter

We visit more than 100 websites daily for financial news (Would YOU do that?)

“John Lothian and Company… our industry intelligence.”

Rick Lane

CEO, Trading Technologies

Past Options Newsletters

Pin It on Pinterest

Share This Story