Stocks are vulnerable to a 5% ‘air-pocket drawdown’ as greedy traders short volatility, research firm says

Feb 16, 2024

Observations & Insight

Editor’s Note: JLN Options will not be published on Monday, February 19, in observance of the Presidents Day holiday. We’ll be back on Tuesday. Have a great weekend!


Term of the Week – Right to Buy or an Obligation to Sell

Perhaps the most fundamental explanation of an option contract.

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From Humble Beginnings to Trading Success: The Journey of Leonard Kok

Leonard Kok came from a humble background, with working parents, and thought he might be a policeman when he grew up. However, when he went into the Army for his national service, he read that the highest paid people were not doctors or lawyers, but traders.

Kok decided he wanted to become a trader. He was captivated by the idea and after 2 ½ years of national service, where he was a lieutenant, he began looking for a job as a trader. However, he discovered he lacked a key requirement: experience.

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Lead Stories

Stocks are vulnerable to a 5% ‘air-pocket drawdown’ as greedy traders short volatility, research firm says
Aruni Soni – Business Insider
Tuesday’s stock-market pullback after a hot inflation report actually showed us something else about the market, one research firm says — and it could lead to a sell-off later this year.
“Stocks on Tuesday seemed to have an additional influence weighing on the broader market,” Tom Essaye, the founder and president of Sevens Report Research, wrote in a note on Thursday. “It turns out that it did… an overcrowded short side of the options market which was reminiscent of the 2018 ‘Volmageddon’ event.”

In Battered China Stocks, ‘Lottery Ticket’ Trades Gain Favor
Carolina Wilson and Yiqin Shen – Bloomberg
In the wreckage of China’s stock-market meltdown, some traders are making long-shot bets that officials in Beijing can stoke a recovery. They’re finding moments to snap up options tied to US-listed exchange-traded funds that track Chinese equities, which have been whipsawed by Covid lockdowns, regulatory pressure and a property crisis. It’s evidence that market participants – who’ve seen shares from Beijing to Hong Kong slump 60% from a 2021 peak – want to be able to capture the upside for the stocks, just in case the government eventually succeeds in stoking a rebound.

As earnings loom, Nvidia options traders brace for monster share move
Saqib Iqbal Ahmed – Reuters
Traders in the U.S. equity options market are betting Nvidia’s upcoming earnings report could spur a massive move in the shares of the world’s most dominant artificial intelligence chipmaker. Nvidia, up about 50% this year, could see its shares swing by about 11% in either direction following its quarterly results on Feb. 21, according to data from options analytics service ORATS. That’s the largest expected move options traders have priced in ahead of Nvidia’s earnings over the last three years and well above the stock’s actual average earnings move of 6.7% over that period, ORATS founder Matt Amberson said.

Nvidia earnings will put an entire stock market meme to the test. Again.
Myles Udland – Yahoo Finance
Wedbush analyst Dan Ives, the most creative voice on Wall Street today, marrying a dramatic flair with a prescient, unabashed bullishness on AI’s investment case, called Nvidia’s quarterly results from last May a “jaw dropping” event. “The Street was all awaiting last night’s Nvidia quarter and guidance to gauge the magnitude of this AI demand story with many skeptics saying an AI bubble was forming and instead Jensen & Co. delivered guidance for the ages,” Ives wrote at the time.

Hedge Fund Investors Are Getting More Demanding About Charges
Liza Tetley and Nishant Kumar – Bloomberg
More hedge funds are agreeing to conditions on their performance fees, reflecting a tougher environment for attracting investors to riskier strategies. A survey by Barclays Plc found 67% of investors now prefer a hurdle rate, meaning the fund must perform a certain amount above a threshold before they can charge incentive fees.

An Inside Peek at the Stocks Top Hedge Funds Are Buying; Big money managers are required to file 13F forms with the Securities and Exchange Commission, revealing many of their Dec. 31 holdings.
Bill Alpert – Barron’s
If you are a serious investor, your sweetheart was likely mad at you on Valentine’s Day. That’s because you were studying the 14,000 different investment positions that hedge fund giant Citadel Advisors had at year-end.
Every Feb. 14, big money managers are required to file 13F forms with the U.S. Securities and Exchange Commission, revealing many of their Dec. 31 holdings. Among the notable new buys at the largest hedge funds were names like Walt Disney, Micron Technology, and Oracle.


Cboe Now Lists iShares By Blackrock ETFs Across Its Entire Global Exchange Network
Cboe Global Markets
Cboe Global Markets, Inc. (Cboe: CBOE), the world’s leading derivatives and securities exchange network, today announced that Cboe Australia has listed for trading new Exchange Traded Funds (ETFs) from iShares by BlackRock. With these new iShares ETF listings, BlackRock becomes the first global asset manager to list its iShares ETFs on each of Cboe’s listings exchanges in the U.S., Canada, Australia, the UK and the European Union. Three of the funds commence trading on Cboe Australia on February 16, 2024, while two Australian hedged versions of the funds are planned to launch February 23, 2024.

HKEX Welcomes Hong Kong Government Appointments To Its Board
Hong Kong Exchanges and Clearing Limited
Hong Kong Exchanges and Clearing Limited (HKEX) today (Friday) welcomes the Hong Kong Government’s appointment of Chan Kin-por and Peter Yan, and its re-appointment of Susan Chow, to its Board of Directors. The terms of the three directors will begin at the conclusion of HKEX’s 2024 Annual General Meeting (AGM) and will end at the conclusion of the AGM in 2026.Laura M Cha and Benjamin Hung will retire from the Board after the conclusion of the 2024 AGM.


Global Markets Brace for Yuan Big Bang When China Holidays End; Investors scoop up options as volatility falls to 2022 levels
George Lei – Bloomberg
Investors are scouring the market for cheap hedges against losses in China’s yuan, just as the world’s second-biggest economy prepares to return from a week-long holiday for the Lunar New Year. With implied volatility across all tenors falling to levels not seen since 2022, options have emerged as the most cost-effective vehicle for protection against a bigger-than-expected yuan depreciation.

2 Financial Stocks That Stand to Gain in a Shaky Market
Steven M. Sears – Barron’s
It isn’t that hard to make money, a very wealthy investor once said. You just have to set your mind to it.

Term Structure
Cboe (Video)
Dan Deming In #Vol411, Dan Deming @Djd551 covers: 30-day realized volatility at 8.2%; $VIX futures term structure & roll market; Large #VIX options trade (April/May call spread); Next week’s events to look out for.


Options Trading Concepts Live
tastylive (Video)
Mike, Nick and Katie take trading questions live on YouTube chat and explain the answers in depth using the tastytrade platform and graphics.

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