Stress test looms for financial system in 2021; Nikkei 225 Options Interest Drops to Decade Low After Rally

Jan 4, 2021

$22,401/$300,000 (7.5%)
Steve Ivey and Robert Khoury

Lead Stories

Stress test looms for financial system in 2021; Volatility rises as shadow banks become a bigger provider of liquidity to markets
John Plender – FT
Be warned. The global financial system in 2021 will face a gigantic stress test. This follows from one of the more important lessons that emerged from the coronavirus-induced market turmoil in March last year — a lesson that is worth revisiting.

*****JJL: I do not like the lead in this John Plender column at all. “Be warned.” If he really meant it, he would have used an exclamation point! Or, he should have made it a hashtag, #BeWarned. Or best of all, he should have put it in proactive language like, “Be prepared.” Be warned is just so sheep-like and passive. Let’s start 2021 by being proactive, not passive.

Nikkei 225 Options Interest Drops to Decade Low After Rally
Min Jeong Lee and Toshiro Hasegawa – Bloomberg
The market’s interest in trading options on the Nikkei 225 Stock Average has dropped to its lowest in more than a decade amid waning demand for protection against volatility. Total open interest on the blue-chip gauge plunged to 1.1 million contracts on Dec. 11, its lowest since May 2009, according to data compiled by Bloomberg. The figure was little changed at about 1.2 million contracts as of Wednesday. In October, trading volume for call and put options on the Nikkei 225 slid to 14,428 contracts on Oct. 26, its lowest in 19 years.

Investors Double Down on Stocks, Pushing Margin Debt to Record
Michael Wursthorn – WSJ
Bruce Burnworth used to clip coupons and look for deals before his investment in Tesla Inc. made him a millionaire. He is part of a widening class of affluent Americans who are doubling, or even tripling, down on this year’s highflying stock market. The S&P 500 has soared 66% since bottoming in March in the early days of the Covid-19 pandemic, while dozens of individual stocks, like Tesla, have surged even higher. Some investors have been tempted to chase bigger gains—and have exposed themselves to potentially devastating losses—through riskier plays, such as concentrated positions, trading options and leveraged exchange-traded funds. Others are borrowing against their investment portfolios, pushing margin balances to the first record in more than two years, to buy even more stock.

Bitcoin Options on Deribit Now Go to $200K After Recent Surge
Kevin Reynolds – Coindesk
The folks over at Deribit apparently think the recent explosion in the price of bitcoin (BTC) from $20,000 to around $32,000 in just over a month, including a 10% rise in the last 24 hours, merits offering traders the ability to bet on a rally to $200,000 by late December. That supersedes the $160,000 option as the most traders can bet the leading cryptocurrency will rise to. Even with today’s wild ride, there’s been no takers at any strike north of $80,000.

Bitcoin Holds Near Record, Ether Surges Amid Crypto Rally
Joanna Ossinger – Bloomberg
Bitcoin held near a record a day after breaching $34,000 for the first time while Ether, another digital currency, also surged as the crypto rally continues.
Ether climbed as much as 22% to about $1,163 following a 30% advance on Sunday. Bitcoin held onto most of its weekend gains, dipping about 1.6% to $33,060 as of 6:53 a.m. on Monday in London, according to a composite of prices compiled by Bloomberg.

Bitcoin plummets 17% for its biggest drop since March as its record-shattering rally stumbles
Amanda Cooper – Markets Insider
Bitcoin plunged as much as 17% on Monday, its biggest single-day decline since March. It fell back below $30,000 at intraday lows after hitting a record high of $34,792.47 on Sunday.
The cryptocurrency is experiencing severe volatility on the heels of a 171% surge in the fourth quarter of 2020. Bitcoin also notched astronomical gains in 2020; its 305% return made it one of the top-performing assets of the year.

New Year brings glad tidings of the Bitcoin ‘stimmy’ trade
Jamie Powell – Financial Times
For many people around the world, Christmas is about giving. The receiving part, however, isn’t bad.
And, while many welcomed tree-sheltered presents containing all sorts of consumer goodies on the 25th, in many corners of the US a more important gift arrived just over a week later.
Yes, we’re talking about the $600 stimulus checks agreed as part of the $900bn Covid relief bill that, after some squabbling with Donnie from Queens, was passed just before the new year. The transfers started to be paid out on New Year’s Day.

Investors wager on lower volatility this year after 2020 turmoil
Robin Wigglesworth – Financial Times
Volatility itself went on a wild ride in 2020, veering from near-perfect calm at the beginning of the year to full-blown panic in March, before central bank stimulus knocked stock market turbulence back to near the long-term average by December. Analysts expect 2021 to be more tranquil, setting investors up to tiptoe back into the risky yet lucrative “short-vol” trade.
The Vix volatility index — popularly nicknamed the “fear gauge” as it reflects the ebb and flow of Wall Street’s anxiety levels — entered last year around the 12 to 13 points level, close to record lows, as investors anticipated a continuation of the longest bull run in history.

Binance Launches “Vanilla” Options Contracts, “European Style”
Mathew Di Salvo – Decrypt
Binance has launched a new Bitcoin options contract. It will allow traders to issue their own contracts. Users will be able to buy Bitcoin at an agreed-upon price, then trade it for other currencies. Crypto exchange Binance today announced a new type of Bitcoin options contract that simplifies things for traders and lets them issue their own contracts for the first time. Termed “European-Style Vanilla Bitcoin Options,” they allow users to buy Bitcoin at an agreed-upon price upon the expiry of the contract, then trade it for other cryptocurrencies.

Deribit Adding Options to Allow Bitcoin Traders to Bet on Rally to $120K, $140K
Kevin Reynolds – Coindesk
The folks at Deribit apparently think betting on a $100,000 bitcoin (BTC) price is so earlier-this-month because on Friday, mere hours before the leading cryptocurrency hit $25,000 for the first time, the crypto derivatives exchange announced contracts on $120,000 BTC with $140,000 added on Saturday morning.

Exchanges and Clearing

Cboe Global Markets Completes Acquisition of BIDS Trading, the Largest Independent Block Trading ATS in the U.S.
Cboe Global Markets, Inc. (Cboe: CBOE), a market operator and global trading solutions provider, today announced it has completed its acquisition of BIDS Trading, a registered broker-dealer and the operator of the BIDS Alternative Trading System (ATS), the largest block-trading ATS by volume1 in the U.S.
Through ownership of BIDS Trading, Cboe gains a competitive foothold in the off-exchange segment of the U.S. equities market, which now accounts for more than 40 percent of overall U.S. equities trading volume. The acquisition of BIDS Trading also provides Cboe with the opportunity to expand its global footprint and diversify its product and service offerings in markets beyond U.S. equities and options.

HKEx explains trading glitch
Avery Chen – Hong Kong Standard
Hong Kong Exchanges and Clearing (0388) says the trading suspension of the derivatives market last September was due to an isolated software issue in the vendor-supplied system. That was the first time the bourse operator had halted derivatives trading. On September 5, 2019, most futures and options exchange players found their systems were not operating normally, as connections to the Hong Kong Futures Automatic Trading System were interrupted. The disconnections were caused by an erroneous logic in a vendor-supplied matching engine partition, said the HKEx incident report. After testing and verification of the interim solution recommended by the software vendor, trading resumed on September 6.

Regulation & Enforcement

Options Trader Alert #2020 – 40 Penny Interval Program Annual Rebalancing
Effective Monday, January 4, 2021, all Nasdaq options exchanges will update the list of issues in the Penny Interval Program pursuant to the annual review provision of the Penny Interval Program (Penny Program). Any option class not in the Penny Program that is among the 300 most actively traded multiply listed option classes overlying securities priced below $200, or an index at an index level below $200, will be added to the Penny Program on January 4, 2021. The issues included in the Penny Program effective on Monday, January 4, 2021 can be found here.

Options Regulatory Alert #2020 – 48 UPDATED, PHLX, NOM, BX, ISE, GEMX and MRX – Weekly Quote Spread Parameter Relief January 4, 2021 through January 8, 2021
Effective January 4, 2021, the market maker quarterly quote width requirements on Nasdaq PHLX (PHLX), The Nasdaq Options Market (NOM), Nasdaq BX (BX Options), Nasdaq ISE (ISE), Nasdaq GEMX (GEMX) and Nasdaq MRX (MRX) will be effective January 4, 2021 through January 8, 2021. The exchanges may, in their discretion, amend these requirements by providing notice to members.


2021 Inflation Trade
Joe Tigay – Cboe
With the fed set to accept above 2% inflation, @JoeTigay discusses potential market implications & previews the $VIX Index & volatility expectations heading into 2021.


2020 annual trends in futures and options trading
This webinar will highlight the main trends in trading activity in 2020 in the global exchange-traded derivatives markets, with category and regional breakdowns as well as exchange and contract rankings.
Date/Time: Wednesday, 27 January 2021 | 10:30 a.m. – 11:30 a.m. ET


(Podcast) OPR 346: Live Holiday Special – TSLA, Bitcoin, VIX and More
Options Playbook – Options Insider Podcast

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