Stock Fear Gauge Falls to Nine-Week Low After Topping 2008 Highs; Are ETFs a New Driver of Market Volatility?

May 8, 2020

Observations & Insight


Lead Stories

Stock Fear Gauge Falls to Nine-Week Low After Topping 2008 Highs
Sarah Ponczek – Bloomberg
Just minutes after the worst U.S. jobs report since the Great Depression, the Cboe Volatility Index fell back to where it was in the early days of the stock sell-off.
The VIX, commonly called the equity market’s fear gauge, fell to 29.5 as of 10:01 a.m. in New York, its first time below 30 since March 3. At that point two months ago, the S&P 500 had fallen 11% from its record high and still had an additional 25% to go before bottoming on March 23. The VIX would rise as high as 85.5, topping the 2008 record, as the coronavirus pandemic took hold.

Are ETFs a New Driver of Market Volatility?
Jim Allen – Barron’s
In the current environment, the turmoil in health care and the economy has been joined by mystifying swings in global securities markets. While the global pandemic has no doubt created and contributed greatly to volatility, the magnitude of the swings raises questions about its origins. That historic extremes have been reached suggests the possibility that innovations such as exchange-traded funds (ETFs) exacerbated, if not led, the wild gyrations.

JPMORGAN: The struggling oil market finally stabilized, but recovery will take up to 3 months
Ben Winck – Business Insider
Global oil demand remains at historic lows as inventory vastly outpaces storage, but JPMorgan analysts think the worst of the commodity-market carnage is over.
The coronavirus pandemic and the ignition of a price war helped push oil futures below $0 for the first time on April 20. Producers worked to curb supply and lift prices, and after weeks of emergency action, inventories are finally turning toward recovery.

Solving the enigma of the volatility smiles
Mauro Cesa –
For years, art historians and scientists have tried to unlock the mysteries of the Mona Lisa’s smile, which flickers and fades when viewed from different angles. Quants are similarly beguiled by the so-called volatility smile, the characteristic shape obtained by plotting implied volatilities against the strikes of an option.

Open Positions on Bitcoin Options Pass $1B for First Time
Omkar Godbole – Coindesk
Open contracts on bitcoin options rose to record highs on Thursday as the cryptocurrency’s price rose into five figures. Data from major exchanges – Deribit, LedgerX, Bakkt, OKEx, and CME – shows that open interest on options rose above $1 billion, surpassing the previous all-time high of $970 million registered on Feb. 14, according to crypto derivatives research firm Skew.

Exchanges and Clearing

Cboe lashes out at SEC order
Lynne Marek – Crain’s Chicago (subscription required)
The statement called aspects of the order regarding reapproval for certain fees “improper and unfair.” The visceral reaction comes after several years of debate over the issue, spurred largely by market participants who have complained about having to pay increasing fees to receive data feeds from each exchange.

Regulation & Enforcement

CFTC Files Charges in $20 Million International Binary Options and Digital Asset Fraud Scheme
The Commodity Futures Trading Commission today announced the filing of a multi-million dollar fraud action in the U.S. District Court for the Southern District of Florida, charging three individuals and three companies with fraudulently soliciting tens of millions of customers and prospective customers to open and fund off-exchange binary options and digital asset trading accounts. These accounts traded foreign exchange currency pairs, metals, and digital assets through websites operated by unregistered binary options and digital asset brokers.

CFTC advisory committee discusses position limits
Will Acworth –
On May 7, the U.S. Commodity Futures Trading Commission hosted a meeting of its Energy and Environmental Advisory Committee to discuss the agency’s proposal to establish speculative position limits for commodity derivatives. The meeting gave the members of the advisory committee, most of whom work for commercial end-users in the energy sector, an opportunity to express their views. The proposal is now in its third iteration since Congress revised the Commodity Exchange Act and authorized an expansion of position limits in the Dodd-Frank Act of 2010.


Backtesting Basics: Trading SPY Options Based On Contango, Skew and VIX Levels
ORATS blog
We received a question from a backtester user and here is the answer.

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