Short-VIX Trade Shows Few Signs of Fading; More BTC; Sleepy Oil; Markets Numb to Risk

Nov 28, 2017

Observations & Insight

Bitcoin stirs volatility fears as it heads for $10,000
Hannah Murphy – Financial Times
The price of bitcoin soared to record highs on Monday and approached the symbolic $10,000 threshold even as some traditional marketplaces warned they were becoming “uncomfortable” with the volume and volatility of trading in the cryptocurrency.
****SD: Some folks must be making that “baby’s first taste of lemon” face.

Just two weeks ago – when BTC was trading for less than $8k – LedgerX initiated it’s first long-term bitcoin futures option with a strike of $10,000 (sold/bought for $2,250.25). The contract expires in December 2018. Oofda.

According to the exchange at the time of the news – “based on LedgerX’s own calculations (made using the Nobel Prize-winning Black-Scholes financial markets model), the startup believes there is a 25 percent chance that bitcoin will reach that level in the allotted time.”

LedgerX CEO Paul Chou said he was surprised two institutional investors agreed to the deal. Maybe he had a sneaking suspicion bitcoin options with a $10,000 strike would potentially be ITM in a month and not a year, Black-Scholes be darned! (I do wonder how people are modeling this stuff. Feels like the textbooks of yesterday are just that – yesterday’s.)

Speaking of the coin world, here’s a weird angle regarding access to coin exchanges through the lens of net neutrality.

Lead Stories

Short-VIX Trade Shows Few Signs of Fading
Chris Dieterich – WSJ
Bets on perpetually low “fear gauge” readings just hit a fresh milestone. Exchange-traded products designed to “short” the Cboe Volatility Index, or VIX, ended Monday with year-to-date returns north of 150%. While stupefying price gains in bitcoin have stolen the spotlight in recent months, short-VIX ETPs are, arguably, the aptest mascots for 2017’s “buy-the-dip” market.

****SD: Round and round it goes, where it stops, nobody knows…

Oil Sleeps Through Saudi-Iran Spat and Imminent OPEC Meeting
Alex Longley – Bloomberg
With tensions between Saudi Arabia and Iran ratcheting up and OPEC about to announce its plans for global crude supply, investors would be forgiven for anticipating a few gyrations in oil prices. The opposite has happened: the market is the calmest it’s been for almost nine months.

****SD: So strange. Shale vs. crude, the actual communication/language from OPEC, Saudi turmoil – how are we seeing such low vol? Also see CME’s Saudi Arabia: Turbulence on the Horizon?

Market’s Numbness to Risk Reminds of Calm Before Storm: Axioma
Andrew Janes – Bloomberg
Cash positions are near 3-5% versus 20% at the start of 2017; U.S.-China trade war is major market risk, d’Assier says
There’s “somewhat of a numbness” to risk among investors right now that’s reminiscent of pre-crisis periods in the past, according to Olivier d’Assier, head of applied research for Asia Pacific at Axioma Inc.

****SD: I will also end up using it again I’m sure, but can “calm before the storm” get banned from current financial market coverage?

QDD – Can Tax Compliance Really Get Even More Taxing?
Daniel Carpenter – TABB Forum
The latest derivatives headache of getting taxed on the implied dividends embedded in the proceeds you may or may not receive – the foundation of the hotly debated 871(m) – is just one aspect of an increasingly perplexing transaction tax system that needs to be managed.

Carney’s More Stressed About Derivatives Than U.K. Banks
Marcus Ashworth – Bloomberg
The Bank of England’s Financial Stability Report released Tuesday crowed that U.K. officials are on top of the domestic banking risks they can control, but sent out a loud warning on what they can’t — Brexit.
That alarm bell is intended not just for the U.K. government, but also to European Union negotiators.

Bulls maul shorts in stocks under F&O ban
Ram Sahgal – The Economic Times
Mumbai: Traders who initiated bearish bets on stock futures and options like Jain Irrigation, Just Dial and a broadcasting company, all of which were in F&O ban till Monday, have and are being forced to cover these positions at a huge loss because of the price rise of the underlying stocks traded on the cash market.

VIX – From Fear Index To Greed Index
Peter Tchir – Forbes
We have all heard the VIX or volatility index referred to as the Fear Index or Fear Gauge. Rising VIX was meant to signal fear in the markets. That is how most investors have historically thought about VIX and traded it (directly or through Exchange Traded Products).


Nordic Capital-Backed Itiviti Announces The Intention To Combine With ULLINK To Create A New Global Force For The Capital Markets Industry
Itiviti, backed by Nordic Capital Fund VII, today announces the intention to combine with ULLINK to build a full service technology and infrastructure provider for global and regional financial institutions.

E*TRADE Ranked Best Option Trading Broker by Benzinga
Donna Fuscaldo – Investopedia
E*TRADE Financial Corporation (ETFC?), the New York-based online brokerage, was onto something with its $725 million acquisition of OptionsHouse in July 2016. At the time, the company said that the purchase would help it compete better in derivatives trading. Since then, E*TRADE has become a leading player in options trading among the online brokers, scoring a top ranking from Benzinga.

Exchanges and Clearing

BoE’s Carney ‘mystified’ by CEO spat at London Stock Exchange
Bank of England Governor Mark Carney said he was “mystified” by the row over the departure of London Stock Exchange Chief Executive Xavier Rolet given that a succession plan had been decided.

Nasdaq ISE, Nasdaq GEMX and Nasdaq MRX Corporate Governance Integration
Nasdaq ISE, Nasdaq GEMX and Nasdaq MRX (collectively, “ISE Exchanges”) have recently received approval from the Securities and Exchange Commission to integrate the corporate governance framework of the ISE Exchanges with that of NASDAQ BX, Inc., NASDAQ PHLX LLC and The Nasdaq Stock Market LLC (collectively, “Nasdaq Exchanges”).

Bitcoin’s ‘Future’ Is Now
Anthony Perrotta – TABB Forum
Always an innovative force in the financial services industry, CME Group recently announced it would launch a bitcoin futures contract in early December. As a single bitcoin approaches a valuation equivalent to $10,000, producing a stratospheric return (approximately +900% in 2017), the launch of a new yet widely understood and accepted product could lend legitimacy to the alternative asset and pave the way for user-base expansion.

****SD: From Seeking Alpha – The Bitcoin Futures Battle


Let’s Talk About Arbitrage – Bitcoin Futures Edition
Kid Dynamite’s World
Let’s get one thing straight right off the bat: this is not a post where I’m going to debate the merits of Bitcoin or discuss it in the comments. Take your zealotry elsewhere. I want to talk about the effect that the launch of Bitcoin futures trading may have on Bitcoin.

JPMorgan says there’s still a fortune to be made betting on tax reform
Joe Ciolli – Business Insider
JPMorgan says the market is underpricing the potential for stock market gains in the event that Republicans successfully overhaul the tax code.
The firm recommends buying bullish single-stock call options on a handful of companies closely linked with tax-reform progress.

Warren Buffett Put Sale Third Quarter 2017 Update
Russell Rhoads – Cboe Blog
A few years ago, I was asked to co-author the study guide that accompanies the 3rd version of The Warren Buffett Way. While doing research for this project I came across a discussion of a handful of index put options that Berkshire Hathaway had sold between 2004 and 2008. Every year when the Berkshire Hathaway annual report comes out, I dig in to see how these trades are doing. I’ve fielded a few questions about this work in the past few weeks so I decided to dig through Berkshire Hathaway filings and compile numbers to see how this long term equity index put sale is going. Here’s the update as of the end of the third quarter 2017.

****SD: Had a bit on WB’s strategy yesterday – here’s the full blown feature.


FX Option Market Update: November 28, 2017
Dan Larsen –
Please click on the attached PDF for the latest FX options market update, including the recent movements in the South African rand and GBP puts.

Trading the Curve in Energies
CME Group via TheStreet
The market is always showing early warning signs as to which direction it is heading into. The forward curve or term structure of the markets is one of those signals that offer a considerable amount of information as to the market sentiment and the potential direction of the market.

Regulation & Enforcement

Randolf Roth: “We provide the data for brokers to argue BestEx.”
Eurex Group
With less than two months until the onset of the new regulatory regime in Europe, investment firms and exchanges are working day and night to finalise their MiFID II plans. However, Eurex has taken this as an opportunity that goes far beyond solving regulatory issues.

Developments on the duty to report securities transactions
Starting from January 2018, foreign participants (i.e. formerly defined as remote member) of a Swiss trading venue and foreign branches of Swiss securities dealers may perform their reporting of transactions in securities admitted to trading on a Swiss trading venue through the regulatory reporting platform of the London Stock Exchange Group. This new possibility is based on an arrangement made between the SIX Swiss Exchange and the London Stock Exchange Group.


What to Worry About in This Surreal Bull Market
Equities keep hitting record highs and volatility hovers near historic lows, all while geopolitical tensions abound. As a surreal bull market staggers onward, Bloomberg Markets asked around for reasons to worry.

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