This Options Bet Helps Tame Markets, but There Are Risks

Feb 11, 2019

Observations & Insight

The Spread – Everything Is Gonna Be (A) Fine – 2/8
What’s your favorite TLA (Three Letter Acronym)? If it’s “SOQ,” then you should definitely tune in. If SOQ is not your favorite TLA, still tune in as there is plenty more exchange news to catch up on.
Watch the video and see the stories referenced here »

****SD: In other options exchange news, the Consolidated Audit Trail operating committee will hold a webinar about the status of the CAT next Wednesday (February 20). Information about the webcast can be found HERE.


Bill Gross’s fall presages the decline of the investing genius
Robert Armstrong – Financial Times (SUBSCRIPTION)
We all take a nasty pleasure in seeing the great brought low, especially if the fallen committed the sin of flamboyance while at their peak.
After this week’s ignominious retirement of Bill Gross, one-time bond king, the schadenfreude is therefore flowing freely. As we fill our cups, however, we might take a lesson — in markets and in leadership — from the arc of Mr Gross’s remarkable career.

****SD: That’s a great first sentence. It’s also why if the Oracle of Omaha (somehow) fails, this piece won’t be written — hard to fault the guy who still eats McD’s for breakfast while never spending more than $3.17 (link to clip from HBO’s documentary “Becoming Warren Buffett”). He only spends the full amount if he’s REALLY expecting to have a good day.

Lead Stories

This Options Bet Helps Tame Markets, but There Are Risks; ‘Reach for yield’ behavior underscores concerns about the early decade-old bull market in U.S. stocks, some analysts say
Gunjan Banerji – WSJ (SUBSCRIPTION)
More investors are selling options in a bid to boost returns, a shift that traders say is helping to tamp down market volatility now—but potentially at the expense of greater turbulence later.

****SD: Current overall margin debt — $554.3 billion — is at the lowest level in a year, according to FINRA.

Options Markets Suggest Swiss Franc ‘Flash Crash’ Is a One-Off
Vassilis Karamanis – Bloomberg (SUBSCRIPTION)
While the Swiss franc’s almost 1 percent drop gave currency traders a shock during Monday’s Asia session, options suggest it’s back to business as usual.

****SD: Looks like it was caused by a poorly executed trade — a Japanese holiday didn’t help the liquidity situation. Don’t forget the other big holiday that could potentially cause trouble is from late April to early May — see Reuters’ Japan’s 10-day holiday stirs concern in traders and investors.

Pound Traders Favor Option Bets With Less Than 50 Days to Brexit
John Ainger – Bloomberg (SUBSCRIPTION)
Currency could move 20 percent either way, says Commerzbank; Bank of England finds ‘fog of Brexit’ in way of outlook
At the Bank of England’s first meeting of the year, Governor Mark Carney tapped into the Brexit conundrum facing pound traders — the currency’s next move is likely to be a big one.

****SD: Reprinted at Yahoo Finance.

Swaps data: SOFR volume and margin insights
Amir Kwaja, Clarus Financial Technology –
This year promises to be an interesting one in derivatives markets, and with January volumes now in, I wanted to look at what the data tells us about two in-flight, high-stakes projects – interest rate benchmark reform and non-cleared margin rules. Let’s start with the Alternative Reference Rates Committee’s (ARRC) progress on introducing a smooth and orderly transition from US dollar Libor to its replacement, the secured overnight financing rate (SOFR), under its published transition plan. This expects that during 2019, increased activity in SOFR-linked futures and overnight interest rate swaps (OIS) will build price histories and help market participants develop a term structure for SOFR.

****SD: A little off grid from our regular comments, but it covers some swaptions activity. From the article: “Option products are often the largest components of these bilateral exposures and generally linear delta risk is substantial in such portfolios. In addition, it is not straightforward to hedge this delta risk – for interest rate swaptions, the natural hedge would be a swap, but this has to be cleared and so cannot be booked into the non-cleared bilateral portfolio; for foreign exchange options, the natural hedge is forex forwards, which are not included in non-cleared margin rules.”

Alphacution’s Book: Not Hiding, In Plain Sight
Alphacution Research Conservatory
The chart that follows represents the content to be covered in this post, and foreshadows a core focus of Alphacution’s research calendar for the weeks and months ahead…

****SD: I love what he’s been doing with the “Hiding in Plain Sight Series.” The gist: “since all market makers and most proprietary trading firms are also registered broker-dealers the combined illumination brought about by 13F and annual X17a5 reports is something I’m looking forward to perhaps more than anyone else. Until recently, these are like critical puzzle pieces that were thought to have never existed, except we now know that they are hiding in plain sight.”

Exchanges and Clearing

Euronext offers $786 million for Oslo Bors as tries to nix Nasdaq bid
Inti Landauro, Terje Solsvik – Reuters
Euronext (ENX.PA) raised its bid for Oslo Bors OSLO.NFF on Monday to around 6.79 billion Norwegian crowns ($786 million), upping the stakes in a battle with Nasdaq (NDAQ.O) for the Norwegian stock exchange operator.

****SD: Other sources: Financial Times, Euronext press release and Bloomberg

Nifty 50 Weekly Options Makes A Stellar Start
Kannan Singaravelu – BloombergQuint
The weekly options contract on the NSE Nifty 50 Index had a stellar start on Feb. 11, with option volumes surging on the first day of trade.
The Nifty 50 Index closed the day at 10,888, and weekly option volumes for strikes that are closer to the spot level recorded more than 60 percent of the cumulative volumes on that strike, according to data available on Bloomberg. The 10,850 and 10,950 strikes accounted for more than 75 percent of the cumulative volumes, with the monthly options making up the remaining 25 percent.

****SD: The other big news regarding NSE from January was, SGX Submit Plan To Trade Through Gujarat Finance Hub. It’s nice when exchanges can kiss and make up.

HKEX Monthly Market Highlights
…The average daily turnover of futures and options in January 2019 was 1,091,651 contracts, a decrease of 23 per cent when compared with the 1,417,938 contracts for the same period last year.

MIAX Options And MIAX PEARL Holiday Schedule
Please be advised the MIAX Options and MIAX PEARL Exchanges will be closed on Monday, February 18, 2019 in observance of Presidents’ Day.


Barclays to shift some credit and equity derivatives sales jobs to Paris: sources
Pamela Barbaglia – Reuters
Barclays is shifting some jobs in its London-based credit and equity derivatives sales teams to Paris as it reorganizes its operations ahead of Brexit, two sources familiar with the matter said.

Regulation & Enforcement

F&O segment: Sebi proposes circuit filters for F&O segment to curb price volatility
Reena Zachariah – Economic Times
The Securities and Exchange Board of India has proposed price bands for all futures & options (F&O) stocks, seeking to curb excessive price volatility in equity scrips that have derivative instruments available for trading.


kACE Announces Streaming FX Options pricing on its latest release of kACE Pro
kACE, a division of Fenics Software Limited, an entity within BGC Partners, Inc. (NASDAQ: BGCP) (“BGC Partners,” “BGC” or “the Company”), today announced that the latest release of its award winning platform, kACE Pro, will enable clients to stream FX Options prices to internal and external clients, single dealer platforms, execution venues and third party platforms.


Key Highlights for 11 Select Sectors
Over the next week, Cboe will roll out options on 11 Select Sector indices. Cboe’s Select Sector Index options are designed to provide investors with an easy way to add specific U.S. industry sector exposure to their portfolios and are expected to have particular utility for investors seeking an alternative to options on ETFs.
The Select Sectors use the GICS (Global Industry Classification Standard) to categorize each company within the S&P 500 Index into one of 11 sectors. The three largest Select Sectors, by weight, are Technology, Health Care and Financials, pointing to a shift toward a services-oriented U.S. economy, rather than a manufacturing-oriented economy.

The V In Volatility
Neuberger Berman – Seeking Alpha
“Investors who sit out now could miss a chunk of this year’s returns.”
Those were the last words that I wrote in one of our CIO Weekly Perspectives in January. Since then, the S&P 500 Index has been consolidating its New Year performance. Those brave enough to buy as the markets closed on Christmas Eve now sit on a return of around 15%, thanks to gains on three out of every four trading sessions. The Europe STOXX 600 and MSCI Emerging Markets Indices are both up by around 10%.


The Benchmark Set to Replace Libor Suffers Volatility Spike
Daniel Kruger and Telis Demos – WSJ (SUBSCRIPTION)
Recent volatility in the market for overnight cash loans is raising concerns about a new benchmark that could set interest rates for trillions of dollars in mortgages and corporate debt.

****SD: I had to do a double take given it was the LIBOR surge that I took note of last week.

Are S&P 500 Companies with More Global Exposure Reporting Lower Earnings Growth in Q4?
John Butters – FactSet
Coming into the Q4 earnings season, there were concerns in the market about the impact of the stronger U.S. dollar, slower global economic growth, and trade tensions on companies in the S&P 500 with higher international revenue exposure. With about two-thirds (66%) of the companies in the index reporting actual results for Q4, are S&P 500 companies with higher global revenue exposure underperforming S&P 500 companies with lower global revenue exposure in terms of earnings growth and revenue growth for Q4 2018?
The answer is yes.

CME Group Announces Record 55,000 NYMEX WTI Houston Crude Oil Futures Contracts Traded Since Launch
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced more than 55,000 NYMEX WTI Houston Crude futures contracts have traded since launch on November 5, 2018. Additional NYMEX WTI Houston Crude Oil Futures records reached include:
Record open interest of 4,004 contracts as of February 7, surpassing the previous record of 1,824 contracts set on February 6
Record single-day trading volume of 4,430 contracts traded on February 7, surpassing the previous record of 2,232 contracts traded on January 31

****SD: Not much happening on the options side yet.

Invest In Vol Offers Vaucluse Volatility Strategies
Invest In Vol, LLC announced today the completion of a strategic partnership with Vaucluse Partners, a quantitative investment advisor focused on volatility as an asset class. This latest partnership allows Invest In Vol to deliver two of Vaucluse’s most successful volatility strategies via its growing Separately Managed Account (SMA) platform.

****SD: I took notice of this tidbit on Invest in Vol’s website regarding the founder of Vaucluse Partners: “Peter Rothschild has a PhD in High Energy Nuclear Physics from MIT and over 40 patents in the detection of explosives, weapons and drugs using advanced x-ray imaging techniques.” I take it this means his investments are less likely to blow up?

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