Volatility Is Low But Ambiguity Is Sky High; Clearing forex options; War on Dutch prop shops

Dec 12, 2017

Observations & Insight

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Lead Stories

Volatility Is Low But Ambiguity Is Sky High
Ben Eisen – WSJ
Two academics are rolling out a new measure of market fear that suggests investors aren’t nearly as complacent as they seem.
The gauge of so-called ambiguity, meant to chronicle the degree of uncertainty investors have in the probabilities they use to make decisions, has been at all-time highs in recent months, indicating that there’s more fear built into the stock market than common measures of volatility suggest. The Cboe Volatility Index, a popular metric for tracking fear in the market, has been idling near record lows this year.

****SD: I’m not sure what this means…

Swaps data: forex options – candidate for a clearing mandate?
Amir Khwaja, Clarus FT – Risk.net
Foreign exchange options have so far been less affected than other products by changes to the structure of over-the-counter derivatives markets. There is no clearing mandate. This is a result of insistence from regulators that any clearing service should cover the potentially huge settlement risks that arise in physically settled options, when the trade notional in different currencies have to be exchanged. The need to solve that challenge has held back the launch of voluntary services.

****SD: Not paywalled – if you are having trouble, access the article from Clarus’ blog here.

Unlucky for some: Europe’s war on 13 Dutch prop traders
Philip Alexander – Risk.net (SUBSCRIPTION)
Liquidity hit feared as FlowTraders, IMC, Optiver and other non-banks face bank-style capital rules
Here, on November 14, a group of shell-shocked executives from Dutch proprietary trading firms assembled for a meeting with their prudential regulator. The day before, the DNB had announced the scrapping of the regulatory framework under which the 13 firms had operated since January 2014.

Low-Volatility 2017 Marks High Demand for VSTOXX
Trading in derivatives tied to the EURO STOXX 50 Volatility Index, or VSTOXX, will end 2017 with record volumes as more investors turn to the benchmark as a gauge of political and market risk in Europe.
The average monthly open interest of futures and options on the VSTOXX has been twice as high in 2017 than a year earlier, underpinned by demand for portfolio hedges against events such as the French elections. Daily trading volume in the futures has been on average 37% higher this year relative to 2016, while trading in options has more than doubled.

****SD: In case you want to refresh your memory, check out the VSTOXX white paper. I like the VSTOXX-VIX spread chart on page two. Another tidbit – from September 1, 2016 to August 31, 2017, VSTOXX had a -.5517 correlation to the S&P and the VIX came in at -.5180, but when compared to the STOXX 50 index, correlations for VIX and VSTOXX are much closer, at -.6560 and -.6607, respectively.

Breaking Through: Linda Raschke, Part 1
Kara Grygotis – Trading Technologies Blog
Kara: You started out as a market maker in equity options, but have become better known as a futures trader. Talk to me about how you made that shift and why you ended up in futures.
Linda: When I started off trading equity options on the floor—this was 1981-82—a lot of things were out of line. There was tons of opportunity, but still, it was not like the liquidity that we have nowadays. So usually we would all leave the floor for breakfast, go upstairs, and then look at other exchanges and other markets to trade. I started trading the S&P futures on the very first day they were listed, only because we were sitting upstairs and looking for other ways to get into trouble.

*****SD: I’d love that to be a response in a job interview. “Could you describe your previous role?” “Well, I spent a good amount of time looking for trouble.”

Austrian Explosion Rattles Europe’s Gas Market
Rob Verdonck, Mathew Carr and Anna Shiryaevskaya – Bloomberg
Europe’s energy markets were rattled for a second consecutive day after an explosion at a natural gas hub in Austria threatened supplies already pinched from a closed pipeline in the North Sea and a cold snap across the continent.
Natural gas and power prices jumped in Europe, and Brent crude oil futures rose above $65 a barrel for the first time since June 2015, extending their premium over the U.S. benchmark. Britain, which is struggling to absorb the impact of a crack that shut down a key North Sea pipeline network, saw some of the biggest increases.

Exchanges and Clearing

‘More to come’ after bitcoin futures launch: Cboe CEO
John McCrank – Reuters
The generally smooth launch of bitcoin futures on Cboe Global Markets (CBOE.O) could pave the way for other cryptocurrency-related products like options and ETFs, the head of the exchange operator said in an interview on Monday.

Qataris to back LSE chairman in activist fight
Samuel Agini – Financial News
One of the London Stock Exchange’s biggest shareholders will vote against an activist hedge fund’s campaign to remove the company’s chairman at a meeting in a week’s time.

Regulation & Enforcement

MiFID II’s Biggest Unintended Consequence? The Rise of ‘Super’ Bulge-Bracket Firms
Tim Cave – TABB Forum
Regulators intended for MiFID II to protect investors with a stronger regulatory framework, greater choice through unbundled services, and a more balanced playing field for firms big and small. But a consistent theme running through all of TABB Group’s equities research this year is that the largest sell-side and buy-side firms are likely to emerge as the big winners of MiFID II.


Using exchange-listed options as a risk management tool for IPO stocks
Gary Delaney, OIC
Markets trade on information. Initial public offerings, or IPOs, can be large events that are popular with investors. An IPO takes place when a new or existing company first issues stock to the public, with the primary goal of raising capital for corporate development.

FX Option Market Update: December 12, 2017
Dan Larsen – TradingFloor.com
Please click on the attached PDF for the latest FX options market update, including information on GBP puts and USDJPY.

Goldman Sachs Is Doubling Down on Its Bullish Commodity Call
Pratish Narayanan – Bloomberg
Bank sees persisting backwardation driving positive roll yield; Raw materials to outperform other asset classes in long run
Commodities will bring better returns than other assets in the long run, according to Goldman Sachs Group Inc.

What Volatility? Rand’s Eerie Calm Belies Political Storm Ahead
Colleen Goko – Bloomberg
The world’s most volatile currency has been rather well-behaved lately, considering the enormous risks lurking around the corner.
South Africa’s rand has traded in a tight range in the run-up to the ruling African National Congress elective conference, set to start at the weekend. Historical volatility has dropped below the one-year average, and the currency is up 0.8 percent against the dollar this month, adding to November’s 3.1 percent gain.


Cboe Benchmark Index Discussion at RMC Asia
Russell Rhoads – Cboe Blog
The opening presentation at the 3rd Annual Cboe RMC Asia matched Matt Moran up with Russell Rhoads (me) for a discussion covering Option Strategies and Option Strategy Benchmarks. Matt and I both work in the Product Advancement area with Matt holding the title of Vice President and my title being Director.


Factbox: Bold calls and Black Swans
Central banks are slowly (but surely) turning off the stimulus taps and many markets are at record peaks, yet judging by the extraordinarily low volatility across most asset classes, investors don’t seem at all worried about a looming collapse.


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