Sleepy options mkt jolted by renewed trade tensions; Scramble for protection; VIX curve

May 8, 2019

Observations & Insight

RCG Weathers Record Cold, Becoming RCG Division of Marex Spectron
Sarah Rudolph – John Lothian News

Rosenthal Collins Group (RCG), the well known Chicago FCM, was recently acquired by London-based Marex Spectron. After a transition that took place over one freezing Chicago weekend, it has been fully integrated into the company and is now the RCG Division of Marex Spectron.

The transition of RCG’s FCM customer business into Marex took place over the weekend of the Super Bowl and, perhaps more notably, during the “polar vortex” that hit Chicago in the beginning of February, sending temperatures down to minus 21 degrees (nearing minus 50 at times with the wind chill factor).

To read the rest of this story, go here.


Adding More Flexibility and Choice – Andrew Whyte, FIS
It was a big year for FIS as the company brought two of its business lines together. In this video, FIS Group President of Post Trade Services Andrew Whyte talks about client trends and the firm’s roadmap for 2019.
Watch the video »


Wednesday’s Miscellany
Spencer Doar – JLN

Free after work and in Chicago today? Oranj’s May After-Hours Fundraiser and Cocktail event benefiting A Leg To Stand On (ALTSO) will take place today from 6:00 p.m. to 9:00 p.m. at Oranj’s Offices. Event sponsors include: Anchor Capital Management Group, Frost Bank, Invesco US, Natixis, Oppenheimer Funds, Redtail Technology and Vestmark. Rally around a great cause in anticipation of ALTSO’s 8th Annual Rocktoberfest – Chicago. Register for free here.

Yesterday’s cleared options volume at OCC was 27,091,833 contracts compared to the YTD average of 19,091,409. (Meanwhile, Monday’s trading day, which had its own extreme market gyrations, was in line with the YTD average.)

There was a Reuters story recently that used the phrase “vol squall.” That’s a good one.

For a broader look at the tariff war’s impact on global markets, here’s a quick look at some of Cboe’s other regional/country vol gauges:
-Emerging Mkt ETF VIX (VXEEM) -> 22+ now after recently ranging between 15-17
-China ETF VIX (VXFXI) -> 25+ now after recently ranging between 17-19
-Brazil ETF VIX (VXEWZ) -> 33+ now after recently ranging between 29-32

As many readers know, I have a bad dairy allergy. Thus, I am part of the captive audience in need of new EpiPens every few years. EpiPen is made by Mylan, one of many drug companies to fall under fire for price gouging. It has given me great pleasure to watch the stock absolutely tank. Karma. (It’s trading ~$22, down from the mid ~$36 a year ago.) Looking at the June monthlys, most of the call open interest is clustered at the 30 strike (~22k contracts) while put OI is scattered in ~3k contract chunks at the 20, 22.5, 25 and 27.5 strikes.

Lead Stories

Sleepy equity options jolted by renewed U.S.-China trade tensions
Saqib Iqbal Ahmed – Reuters
Months of calm in U.S. stocks gave way to a surge in activity in the options market on Tuesday as investors spooked by escalating trade tensions between the United States and China boosted Wall Street’s so-called fear gauge to the highest level in three months.

****SD: The four trading days prior to Tuesday all sported similar OCC total cleared volumes in the ~20-21 million contracts range which is a million or so contracts more than the YTD average. I should be clear though; by no means is 2019’s YTD ADV of ~19 million contracts sleepy in the historical sense. OCC average daily total volumes from 2012-2017 were in the 16-17 million contract range.

Scramble for Stock Protection Surpasses Fourth-Quarter Risk Rout
Luke Kawa – Bloomberg (SUBSCRIPTION)
Options pricing signals investors worried about tariffs; Trump trade threats send S&P 500 into two-day tailspin
As bad as the two-day rout in U.S. stocks has been, a growing cohort of investors is betting the worst is yet to come.

The Ferocity of This Market Sell-Off Eclipses the Christmas Eve Rout
Elena Popina – Bloomberg (SUBSCRIPTION)
Almost 90 percent of NYSE-listed stocks traded lower Tuesday; Total put and call volume on VIX options hit Feb. 2018 high
Seldom in 2018 did investors feel worse than on Christmas Eve. That’s when a whirlwind of selling sent the S&P 500 within points of a bear market. By one measure, the pressure in stocks is even worse today.

****SD: How’s your gamma profile lookin’?

Volatility Pricing Goes a Little Haywire
Unusual moves in volatility markets have raised concerns about record bets on continued calm in U.S. stocks. But fear not: a return of February 2018’s “Volmageddon,” when several short-volatility funds blew up, is unlikely.
Prices for the Cboe Volatility Index or VIX, which measures expected equity volatility, jumped Tuesday as U.S. shares dropped. Notably, too, VIX futures that expire at the end of this month ended the day costing more than those expiring in June and July.

****SD: In case you haven’t been eyeing the curve.

Market Pullback Pays Off for VIX Wagers
Asjylyn Loder – WSJ (SUBSCRIPTION)
Traders betting on a spike in Wall Street’s fear gauge are the big winners from Tuesday’s market turmoil.
The Cboe Volatility Index, a measure of stock market turbulence known as the VIX, typically rises when stocks fall, making it an appealing form of insurance against sudden downdrafts. When the S&P 500 fell 1.7% Tuesday, the VIX jumped almost 34%, its biggest one-day gain since October.

Expectations for eurozone stock tumult mount on rising global tension
Sarah Provan – Financial Times (SUBSCRIPTION)
Investors are bracing themselves for a greater degree of turbulence in shares of the eurozone’s biggest companies as global equity markets have wobbled this week amid mounting geopolitical uncertainty. The volatility gauge for the Eurostoxx 50 index of the bloc’s blue chip companies rose on Wednesday to a five-month peak of 18.8, Refinitiv data show. The index, at its highest since January 14, measures trading in the options market to forecast tumult.

Eerie Parallels on Anniversary of Pain as Emerging Markets Stall
Marton Eder – Bloomberg (SUBSCRIPTION)
It isn’t good news for emerging markets if a rebound stalls in April and May: Last year, it marked the start of a multi-trillion-dollar meltdown from which investors have yet to recover.

Exchanges and Clearing

Quarterly Results For the Three Months Ended 31 March 2019
The Board is pleased to present the unaudited consolidated results of the Group for the three months ended 31 March 2019.

****SD: Stock options ADV up 21 and derivatives ADV up 3 percent compared to Q1 2018.

HKEX: Temporary Holiday Risk Management Arrangements – Special Intra-Day Margin Call In Respect Of The Buddha’s Birthday
Press Release
The Traded Options Market will be closed for business on 13 May 2019. In order to assure that safeguards are in place against potential market risk that may arise during the aforesaid period when some of the major markets are open, the Clearing House has decided to make a special intra-day margin call in respect of all open positions on Friday, 10 May 2019.

****SD: Buddha gets an exception.

FIA Launches Podcast to Feature the Issues, People and Trends of the Global Futures, Options and Derivatives Industry
FIA today launched FIA Speaks – a podcast to provide greater insight into the people, major topics and trends in the global futures, options and derivatives industry. FIA Speaks will feature executives, regulators, industry experts and business visionaries that explore the issues and the trends of the industry. FIA Speaks will be hosted by FIA President and CEO Walt Lukken with contributions from other FIA senior staff members.


Itiviti gears up to accelerate sell-side OMS adoption, providing upgrade path for Bloomberg SSEOMS clients
Itiviti, a leading technology and service provider to financial institutions worldwide, today announced that its multi-asset Order Management System (OMS) has been selected by several customers who were currently using Sell-Side Execution and Order Management Solutions (SSEOMS) from Bloomberg L.P. Following Bloomberg’s recent announcement that the firm will discontinue its SSEOMS product, clients need to consider other options.

New for 2019, Buy More Grain with Barchart’s cmdtyView 2.0 Release
Barchart, a leading provider of data and analytics to U.S. agribusinesses, is releasing cmdtyView 2.0, the latest evolution in the world’s most powerful commodity trading platform. All cmdtyView Pro users will automatically get access to all of the new data, tools, and features that are solely focused on helping commodity buyers make better decisions and get better pricing.

****SD: Barchart’s cmdtyExchange event kicks off in full tomorrow, April 9, at Venue SIX10, 610 S Michigan Ave in downtown Chicago. If you’re opening this email shortly after arrival in your inbox, you have a small window of time left to register.


This under-the-radar trade can help you beat the market as tariff tensions flare — even if stocks are getting crushed
Joe Ciolli – Business Insider Prime (SUBSCRIPTION)
…When large market moves happen, disconnects form, which wise investors can then exploit.
Pravit Chintawongvanich of Wells Fargo has identified one such irregularity, and it stems from an interesting market wrinkle: Firms with minimal international exposure have outperformed during past periods of trade-war strife.

****SD: TL;DR – volatility in U.S. small caps looks overdone compared to emerging markets/China, so, sell an IWM 155 put and buy 3.7 FXI 41.5 puts (June expiration) to play the trade war.

Jay Soloff – MoneyShow
Up until last February, the Cboe Volatility Index (VIX) was the only market volatility index which could be traded through derivative products. The index itself is not tradeable, but VIX futures, options and VIX-related ETFs are all widely popular products. While the usage of these products varies, they all rely on the VIX as the underlying instrument.

Volatility Makes A Welcome Return
Clif Droke – Seeking Alpha
In recent months, traders – bulls and bears alike – have lamented the lack of volatility in the U.S. broad market. For bears the lack of volatility has meant an absence of significant short selling opportunities, while for bulls the low-volatility environment has meant fewer entry points for initiating new long positions. With the latest return of news-induced volatility, fresh possibilities are now available for both sides. In today’s report I’ll make the case that this week’s trade-related selling will create more opportunities for the bulls than the bears in the coming weeks.


Burned-Out Broker Gets Rich Helping Millennials Trade for Free
Rahul Satija – Bloomberg (SUBSCRIPTION)
Nithin Kamath’s Zerodha is India’s most popular brokerage; He faces a new tech-savvy rival as Paytm enters the market
After a decade working as a trader and a broker in India, Nithin Kamath was burned out and frustrated with a securities industry that seemed stuck in the past.

****SD: The brokerage makes money on options, futures and intraday equities transactions.

Each Word of Trump’s Tariff Tweets Wiped $13 Billion Off Stocks
Divya Balji and Matthew Burgess – Bloomberg (SUBSCRIPTION)
It was a total of 102 words that erased about $1.36 trillion from global stocks this week.
Equity markets across the world were roiled by President Donald Trump’s tweets Sunday that he would boost tariffs on Chinese goods. Not only did they spark losses, but volatility came roaring back with a vengeance, with the Cboe Volatility Index rising 50 percent in two days to breach 20 for the first time since January.

****SD: Tweeter-In-Chief = social media political risk.

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