The Reddit Frenzy Has Already Quadrupled Silver’s Options Volume; A Onetime Giant of Volatility Has Gone Haywire in OTC Trading

Feb 2, 2021

$27,651/$300,000 (9.2%)

Observations & Insight

JJL: The retail traders flooded the market with orders to capture their profits, either through selling their options or selling futures against them. However, in New York, the TOPS printers went down at the Comex and orders had to be routed to the NYBOT and run down the street. The result was absolute chaos that saw market orders come back unable. It took days to find out what we should have known on day one and before the open of day two.

JJL: Here are some highlights from the CME Group’s January volume report. Equity index average daily volume (“ADV”) grew 31% from January 2020 and the CME saw record ADV of 189,000 in Micro E-mini Russell 2000 futures. Overall, Micro E-mini equity index futures ADV was 2.3M. The micro E-mini futures and options represented 41% of overall equity index ADV during January 2020. Over on the agricultural side, ag futures and options ADV rose 36% from January 2020, including 89% agricultural options ADV growth. The corn options ADV grew 159% from January 2020 and soybean options ADV grew 147% from January 2020.

SC: In a world where the retail trader is in the driver’s seat, it stands to reason that exchanges including Cboe Global Markets, Inc. and CME Group, Inc. would expand their mini and micro contract offerings. On Monday, Cboe announced plans to launch Mini-Russell 2000 Index options on March 1, pending regulatory approval. This will be its third mini contract; the other two are Mini VIX futures and Mini S&P 500 Index Options. A Cboe spokeswoman said the exchange aims to appeal to “sophisticated” retail traders, not amateurs. Mini-Russell Index options are one-tenth the size of standard Russell 2000 Index options contracts and provide exposure to the U.S. small-cap equity sector. More details here.~SC

MR: Robinhood has been sending a lot of emails to everyone with an open account on the platform. Even I’ve been getting them, and I don’t think I’ve ever traded so much as a single stock with them (I mainly made an account a long time ago to check out its user interface). The most recent one, sent on February 1st at approximately 6 PM CST, includes a statement explaining to its customers why the company placed purchase restrictions on certain stocks. “We wanted to reach out to you after a transformative week in the markets to answer a question we know many of you are asking: ‘Why did Robinhood limit certain stocks?'” It includes a link to a letter directed at its customers on Robinhood’s blog. Most of the statement consists of paragraphs reaffirming Robinhood’s mission to improve public inclusivity in the financial markets before getting to the crux of the matter. “Simply put, Robinhood limited buying in volatile securities to ensure it complied with deposit regulations.” It also includes a link to another blog post from last week, which explains the platform’s reasoning for putting temporary restrictions for buying certain stocks, and derivatives on those stocks, in greater detail.

Lead Stories

The Reddit Frenzy Has Already Quadrupled Silver’s Options Volume
Michael Roschnotti – Bloomberg
Premium paid for calls surges to the highest since 2007; IShares Trust implied volatility jumps as traders buy up calls
The silver options market, normally a quiet zone compared to gold or oil, has burst to life, roiled the most in years by the Reddit frenzy. Volume of Comex calls and puts Monday were more than four and a half times the previous year’s average.

A Onetime Giant of Volatility Has Gone Haywire in OTC Trading
Yakob Peterseil – Bloomberg
On a day when U.S. stocks rallied the most in two months, a leveraged note that should struggle when markets are rising did something unusual: It surged 21%.
Even as the value of its underlying holdings dropped, the VelocityShares Daily 2x VIX Short Term soared Monday to the highest since Nov. 3. While these days it trades over-the-counter with the ticker TVIXF, the note is perhaps best known to most as TVIX, once one of the largest exchange-traded volatility products in the world.

VIX, Skew, ETF Shorts Show Stock Market Still Pretty Far From OK
Lu Wang – Bloomberg
With GameStop Corp. in retreat, sings of normalcy emerged on Wall Street. Which in 2021 means traders were free to get back to stressing about SPACs, crypto and all those Faang options still in circulation. Given the backdrop, it no surprise that volatility futures are refusing to sound the all clear. Contracts on the Cboe Volatility Index showed traders are wagering on an elevated level of price swings all the way through March. In options, the cost of S&P 500 puts rose to a three-year high relative to calls, a sign of caution among options traders.

High VIX Means Credit Volatility Might Be the Place to Hedge
Joanna Ossinger – Bloomberg
The disconnect between the surge in price swings in equities and a much calmer corporate bond market offers an opportunity for investors to hedge risk via credit, according to Tallbacken Capital Advisors LLC.
The ratio of the Cboe High Yield Corporate Bond ETF Volatility Index to the Cboe Volatility Index is near historically low levels, data compiled by Bloomberg going back to 2015 show. That feeds in to the pricing of options which means investors can pick up relatively cheaper portfolio buffers in the credit market, against the possibility of a pull back in risk sentiment, said Michael Purves, strategist and chief executive officer at Tallbacken.

After $1 billion year, GSR looks to expand footprint in bespoke crypto options
Frank Chaparro – The Block
After a landmark year for the digital asset derivatives space, one market-making firm is expanding its suite of bespoke options. GSR Trading—one of the longest operating liquidity providers in the space—told The Block that it is now offering bespoke options in Filecoin, Polkadot, and Algorand. Unlike vanilla options that trade on an exchange like Deribit’s order-book, GSR’s bespoke options are custom-made for larger investors in the market, with GSR acting as the counter-party.

Stock market analysis: GameStop not causing bubble, Morgan Stanley says
Marley Jay – Business Insider
For almost a century, if not longer, many expert investors have said that when regular people start to rush into the stock market, a bubble is forming and a crash is coming.
It’s a belief that was shaped by famous early 20th-century investors like Joseph P. Kennedy and Bernard Baruch, who described the Roaring Twenties as a period where everyone from cooks to shoeshine boys played the market hoping to get rich — inspiring some big investors to sell before the Depression while regular people lost everything.

Living in a Post-GameStop World
Frank Kaberna – tastytrade
The rivalry between Wall Street and Main Street has inspired everything from works of art to public protests, and the 2021 version of this age-old dichotomy is…(adjusts glasses)…the stock price of a video game retailer? Recent activity in stocks like GME and AMC has driven many new voices to ring out in the financial markets, which, in turn, has created great volatility and potential opportunity for the everyday trader. This opportunity, as many saw last week, comes with fine print:

Exchanges and Clearing

OCC January 2021 Total Volume Up 61.7 Percent from a Year Ago; Highest volume month on record for U.S. equity options industry
OCC, the world’s largest equity derivatives clearing organization, announced today that January 2021 total cleared contract volume was 843,542,290 contracts, the highest month on record and up 61.7 percent from January 2020. Year-to-date average daily cleared contract volume through January was 44,396,963 contracts, up 78.7 percent from January 2020.

Robinhood’s bid to ‘democratise finance’ collides with Wall St reality
Miles Kruppa, Madison Darbyshire and Philip Stafford – Financial Times
Robinhood’s ambition to “democratise finance” is set for one of its biggest tests after a week of chaotic trading that pushed it to seek an urgent injection of $1bn and infuriated many of its most loyal clients.
The tumult has exposed the competing priorities the popular trading app faces between pleasing its users and the realities of operating in the heavily regulated financial industry.

Cboe Options Exchange to List Mini-Russell 2000 Index Options (MRUT) Beginning March 1; Smaller contract at one-tenth the size of standard Russell 2000 Index options; Designed to provide greater flexibility and precision for U.S. small-cap equity trading strategies; An alternative to comparable ETF options providing exposure to U.S. small-cap equities; Cash-settled (no unwanted delivery of physical shares) and European-style (no early exercise); MRUT Weeklys include Monday, Wednesday and Friday expiries
Cboe Global Markets, Inc.
Cboe Global Markets, Inc. (Cboe: CBOE), a market operator and global trading solutions provider, today announced plans to launch trading in Mini-Russell 2000 Index options on Cboe Options Exchange beginning Monday, March 1, pending regulatory approval.

Cboe to launch Mini-Russell 2000 index options; The mini options share the same contract terms as standard Russell 2000 Index options but are one-tenth the size, offering clients more manageable access to the index.
Annabel Smith – The Trade
US derivatives exchange Cboe Global Markets is expected to launch a set of Mini-Russell 2000 Index options on 1 March, subject to regulatory approval. The mini options share the same contract terms as standard Russell 2000 Index options but are one-tenth the size, offering clients direct access to the index in a more manageable and cost-effective contract.

Ag Barometer drifts lower, farmers remain concerned about the future despite strong economic conditions
CME Group
The Purdue University/CME Group Ag Economy Barometer dropped 7 points in January to a reading of 167. While the Index of Current Conditions remained relatively flat, down 3 points to a reading of 199; the Index of Future Expectations fell 10 points to a reading of 151. Since its peak in October of 2020, the Ag Economy Barometer has fallen 9 percent, all attributable to weaker expectations for the future. The Index of Future Expectations has fallen 19 percent since October, while the Index of Current Conditions rose 12 percent over the same time period. The Ag Economy Barometer is calculated each month from 400 U.S. agricultural producers’ responses to a telephone survey. This month’s survey was conducted from January 18-22, 2021.

CME Group Reports January 2021 Monthly Market Statistics
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today reported January 2021 market statistics, including average daily volume (ADV) of 19.2 million contracts during the month.

Regulation & Enforcement

House Financial Services Panel Sets GameStop Hearing for Feb. 18
John Harney – Bloomberg
The House Financial Services Committee will hold a hearing regarding “recent market volatility” involving GameStop Corp. and other companies on Feb. 18.
The virtual hearing was announced on Monday evening in a short statement by the committee chairwoman, Maxine Waters, a California Democrat. The statement, however, did not say if any witnesses would appear.

Reddit-fueled trading could increase risk in the system, but Congress should not pick winners and losers, House Democrat says
Will Daniel – Markets Insider
Massachusetts Democratic representative Stephen Lynch said Reddit-fueled trading could lead to “systemic risk” in an interview with CNBC on Monday. He added, however, that Congress shouldn’t pick winners and losers in the battle between institutional short-sellers and Reddit’s Wall Street Bets.
“I do worry about systemic risk in the longer term,” Lynch said. “When we get 20 times the volume on options and this whole convergence with social media, fintech, the democratization that Robinhood brings. We didn’t anticipate this. This is sort of an abrupt and manic development.”

Technology Reports a Record 3.7 million Users for January 2021
Barchart, a leading provider of market data and technology services to the financial, media, and commodity industries, announces that recorded a record 3.7 million users for the month of January 2021. The financial media arm of Barchart, provides investors, traders and other market participants with access to market data, information and premium tools covering stocks, ETFs, indexes, options, futures, commodities and currencies. January marks the first time the financial media platform has exceeded 3 million users in one month.

HSBC launches AI pricing chatbot for foreign exchange options; The chatbot uses natural language processing (NLP) to analyse information from numerous sources and distribute it to clients as well as internally within the bank.
Annabel Smith – The Trade
Investment bank HSBC has launched a pricing chatbot that uses artificial intelligence to give clients instant pricing and analytics for foreign exchange (FX) options.

CME Group Completes Migration of BrokerTec Trading Platform to CME Globex
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that BrokerTec, a leading provider of electronic trading platforms and technology services in fixed income markets, has migrated its U.S. Treasuries benchmark trading and U.S. Repo platform to CME Globex. This follows the integration of BrokerTec’s EU government bond and repo markets in January.


How the GameStop options frenzy could price itself out of existence
William Watts – MarketWatch
There’s an old saying among commodity traders that the cure for high prices is high prices. The same likely will prove true for options on GameStop Corp. and other highflying targets that have become popular on Reddit message boards, argued one veteran options analyst.
The idea is just Econ 101: as prices for wheat or oil or gold rise too high, users naturally use less of the product. As demand is rationed, prices eventually decline (the same idea works in reverse, with low prices seen as the cure for, you guessed it, low prices).

Twitter Stock Could Spike After Earnings. How to Play It With Options.
Steven M. Sears – Barron’s
For a company that plays such a critical role in how we communicate with each other, Twitter should exist in some rarefied place within the stock market. But the social-media company is still treated like an arriviste with unproven potential.
Shares of Twitter (ticker: TWTR) have declined 2.2% so far this year. The company played a huge role in the presidential administration of Donald Trump, who used Twitter like a bully pulpit but has since been banned from it. Investors will soon get a sense of Twitter’s financial condition—and management’s views of the business—in the post-Trump era when the company reports fourth-quarter earnings on Feb. 9. An analyst day is planned for Feb. 25.

If You Want to Buy GameStop Stock for Fun, Here’s Why You Should Think Twice
Bourree Lam and Caitlin Ostroff – WSJ
It is tempting to want to get in on the GameStop rally.
The stock rose over 1,600% in January. People are claiming to have become overnight millionaires. For some, there is the bonus incentive that all the craziness seems to be part of a movement to stick it to Wall Street.
So a sense of FOMO, or fear of missing out, is understandable.
Still, there are plenty of reasons to fight the urge to jump in. And there is plenty to know if you just can’t resist.


Registration is open! – FIA Boca 2021

GFF Summit: A cordial invitation and some valuable information
Frank Ghast – Eurex
I hope you are all safe and sound and that I will see many of you at Clearstream and Eurex’s joint Global Funding and Financing (GFF) Summit 2021 from Tuesday, 2 February, to Thursday, 4 February 2021 – even if, unfortunately, only virtually this year. In the ramp-up to the summit, let me take the opportunity to quickly recap 2020 and take a look at what’s ahead.

Save the Date – April 28 & 29
The Options Industry Conference is Going Virtual in 2021
Join OCC and the options exchanges for the 39th annual Options Industry Conference, April 28-29, 2021. While the conference will be held virtually for the first time in history, the focus will continue to be the key topics facing the options industry today, from the regulatory shifts in the U.S. and Europe to the technological developments that are driving monumental change in markets around the globe.


Twitter Savvy 28-Year-Old Has Big Plans for a Volatility Hedge Fund
Yakob Peterseil and Elena Popina – Bloomberg
By now, Kris Sidial has his daily routine down to a T. After an hour at the gym, the 28-year-old New Yorker spends mornings and afternoons on incessant Zoom calls with prospective investors for his fledgling hedge fund while keeping one eye on markets. That leaves evenings free to pore over investment strategies and study toward a master’s degree in computer science at the University of Pennsylvania.

Stocks add to gains as Reddit trades show signs of unwinding
Leke Oso Alabi and Alice Kantor – Financial Times
US equities rose on Tuesday, as focus shifted from Reddit’s day traders to negotiations between Joe Biden’s administration and Republican lawmakers over a proposed $1.9tn US stimulus package.
The blue-chip S&P 500 index rose 1.2 per cent at the opening bell and the tech-heavy Nasdaq Composite climbed 1.1 per cent, ahead of earnings results from Amazon and Alphabet, Google’s parent company.

John Lothian Newsletter

We visit more than 100 websites daily for financial news (Would YOU do that?)

“John Lothian and Company… our industry intelligence.”

Rick Lane

CEO, Trading Technologies

Past Options Newsletters

Pin It on Pinterest

Share This Story