Observations & Insight
Term of the Week – Right to Buy or an Obligation to Sell
Perhaps the most fundamental explanation of an option contract.
Six Years After Volmageddon, Volatility Fears Resurface in US Stocks; Options-selling strategies lure billions as investors seek steady income
Sam Potter and Lu Wang – Bloomberg
Six years after a famous blowup in the volatility market shattered a lengthy calm in US stocks, the latest Bloomberg Markets Live Pulse survey reveals growing Wall Street concern over a new boom in trades that bet against equity turbulence. In this latest era of prolonged stock-market serenity, billions of dollars are pouring into strategies that seek to juice returns by selling options.
Watch Out, There’s a New Short Volatility ‘Gone Too Far’ Trade In Town
Tracy Alloway – Bloomberg
It’s February, and that means traders’ minds have turned to love, bonuses, the Superbowl, and the anniversary of Volmageddon.
But six years after the infamous winter blowup in the volatility market helped roil the wider S&P 500, some traders are warning that a new way of betting against ‘vol’ is setting up an eerily familiar scenario. At issue is the short-dispersion trade, in which investors use equity options to bet on the relative volatility between single stocks and stock indexes.
Traders are already bracing for the U.S. presidential election to roil the stock market
Joseph Adinolfi – MarketWatch
Although it is still roughly nine months away, investors are already paying up to protect their portfolios from any market-rattling fallout from the November U.S. presidential election, options-market strategists said.
October futures tied to the Cboe Volatility Index VIX have recently risen above 20, indicating increased demand for S&P 500-linked options expiring the following month. The election will take place Nov. 5, and is expected to feature a rematch between President Joe Biden and former President Donald Trump.
Some Hedge Funds Keep Over Half of Their Profits Through Customer Fees; Clients got 41% of gains at funds passing on all costs; Investors signal they may allocate more to hedge funds in 2024
Nishant Kumar and Liza Tetley – Bloomberg
The priciest multistrategy hedge funds are now keeping most of the profits they generate, while clients shoulder their costs.
Clients received 41 cents of every $1 made by multistrategy funds that passed on all their costs last year, according to a survey by the prime brokerage unit of BNP Paribas SA. Their share is down from 54 cents in 2021, reflecting a startling new reality where the most popular funds effectively have a blank check for expenses.
Hedge Fund Verde Builds Small China Bet After ‘Horrendous’ Rout
Vinicius Andrade and Henry Ren – Bloomberg
The selloff in China’s equity market at the start of the year has Luis Stuhlberger looking for opportunities in the battered shares of smaller companies.
The Brazilian money manager’s flagship Verde fund built a long position on a Chinese small-cap index it didn’t name, according to an investor note Friday. The wager was placed via options, the fund added, without disclosing its exact size.
Is China Oversold? Some Big Investors in Hedge Funds Think So
Caitlin McCabe – The Wall Street Journal
Has the China selloff gone too far?
That’s a question for some hedge-fund investors as they think about where to put money this year. A report from BNP Paribas shows some think the pessimism is too extreme—and that could present opportunities.
Trading Technologies acquires ATEO as part of push into post-trade; Deal builds on an existing strategic partnership between the pair announced in late 2022 to deliver a sell-side focused post-trade allocation service.
Annabel Smith – The Trade
Trading Technologies has moved to expand into clearing technologies with the acquisition of listed derivatives post-trade solutions provider ATEO SAS. Terms of the deal were not disclosed. It is expected to close at the end of February. The deal builds on an existing strategic partnership announced by the pair in late 2022 and is designed to deliver a post-trade allocation service to the sell-side.
Digging deeper into deep hedging; Dynamic techniques and gen-AI simulated data can push the limits of deep hedging even further, as derivatives guru John Hull and colleagues explain
Jacky Chen, Yu Fu, John Hull, Zissis Poulos, Zeyu Wang and Jun Yuan – Risk.net
Traditionally, derivatives portfolios have been hedged by managing their sensitivity to changes in underlying factors such as volatility or interest rates. These sensitivities are labelled with Greek letters: delta, gamma, vega, etc. The Greeks have the advantage that they are easy to calculate and additive. (For example, if portfolio Z is the sum of portfolios X and Y, the delta of Z is the delta of X plus the delta of Y.) However, they are imperfect tools. They look at the portfolio at one
Boost Your Success by Trading Frequently
Kai Zeng – tastylive
Traders often grapple with the question of whether to engage in bulk trading or to adopt a small-scale approach with multiple entries and exits. The answer to this question lies in the understanding of statistical outcomes and risk management.
Bulk trading, where traders enter and exit positions with multiple contracts at once, may seem appealing because of its simplicity. However, its counterpart, small-scale trading, where the same total number of contracts is traded consecutively one by one, offers a different set of advantages. The latter aligns more closely with the law of large numbers, which suggests that increasing the number of occurrences in trading can lead to results that are more predictable and in line with statistical expectations.
BATs SPX Put Broken Wing Butterfly Strategy
Mike, Nick and Katie take trading questions live on YouTube chat and explain the answers in depth using the tastytrade platform and graphics.
Some upcoming earnings reports to keep a lookout for include $ABNB, $KO, $HOOD and $KHC. In #Vol411, Joel Hawthorne @louiswinthrop shares additional earnings season updates, trading action so far today, this week’s economic data and more.