Observations & Insight

EDITOR’S NOTE: JLN Options is happy to have Henry Schwartz, President of Trade Alert, as a guest editor this week. Take it away Henry!

Complex Orders and Daily Options Volume
Henry Schwartz – Trade Alert

It’s a great honor to edit the JLN Options newsletter this week because I have always found it to be a crucial source of timely and relevant news (and not ‘fake news’) for professionals in our dynamic industry! Tapping into the massive data stores we have collected over the past decade at Trade Alert, I will do my best to highlight a few trends and issues while weighing in the daily dose of options market stories compiled by John and his team of experts!

Today’s chart shows the growth of complex orders in context with overall daily option volume.

(Click for larger image)

While spreads have been a part of the options business since synthetic puts began trading in OEX circa 1973, they have become a greater and greater part of the picture as markets have automated, in large part because automated complex order books have streamlined the trading process. Of the 14 exchanges operating today (and MIAX Pearl is slated for February), eight now have complex order books and fully one-third of the typical day’s volume is marked spread. Zooming in on the three largest exchanges by volume, CBOE, ISE and PHLX, our data shows 49% of the flow to be part of complex orders, which explains why MIAX recently launched COB functionality, and BATS will soon follow suit. From my view, the most exciting thing about complex order functionality is how it brings a much-needed shot of innovation and creativity into our market, which is good for everyone.

Lead Stories

The Volatility Paradox: Calm Markets but Soaring ‘Fear Gauge’ Trading
Gunjan Banerji – WSJ
Trading in volatility-linked investments set records in 2016 during a mostly calm year in markets, underscoring the popularity of exchange-traded products that didn’t exist a decade ago.
Daily volume in the five most-traded exchange-traded products that track the CBOE Volatility Index, or VIX, hit a record 84.9 million shares on average this year, FactSet data compiled by The Wall Street Journal show. That is almost double the high set in 2015. The products – exchange-traded funds and notes – trade in real time like stocks on an exchange.

***HS: Very unusual to see volatility rising sharply into a climbing market. Last week implied volatilities in a number of large cap financials jumped several points on the same day underlying shares hit 7 year highs.

European Index Derivatives Markets Positioned to Support Trading Needs of Investors World-Wide Alongside Shifting Economic and Regulatory Environments, says TABB Group Study
Globe Newswire
Financial regulations are driving market participants from an over the counter (OTC) market structure to an exchange-listed environment. As a result, these mandates are shaping where investors search for instruments to manage exposure. New research by TABB Group, “Eurex Derivatives Markets: Renewed Growth as Sector Demand Emerges,” examines investors’ interest in trading European derivatives, with a particular focus on the growth in trading on Eurex’s STOXX Europe 600 (SXXP) and EURO STOXX (SXXE) sector indices. The research also examines use cases for these derivatives.

A hot new hedge fund is based on smart computers picking off dumb ones
Rachael Levy – Business Insider
Manoj Narang has been using data and technology to invest for nearly two decades. Now, he’s launching a $1 billion hedge fund that combines computer-driven investing decisions and high-frequency trading with data on stock market patterns. In the industry, these are called quant and alternative data strategies.

***HS: Scale is the only way for many to manage the fixed costs of transacting in high-speed fragmented markets.

Stocks and VIX Turn Heads by Moving in Lockstep for Two Days
Corrie Driebush – WSJ
Two major stock and options market indicators were on the same page this week, an unusual alignment that some strategists view as warning that stock indexes could be headed for a fall. The S&P 500 closed at fresh highs the last two days, signaling investor enthusiasm for stocks. The CBOE Volatility Index, which measures expectations for swings in the S&P 500, also climbed those two days, a sign of increased hedging activity. That is unusual at a time when the market is rising.

Is The Fed Still Relevant? Markets Say YES!
Bob Lang – CBOE Options Hub
While it may seem stocks have been surging higher since the election a month ago, some areas of the market have stalled out and have retreated. The Fed will meet this week, and with markets at all time highs and broad sector rallies around each turn it appears there is not a weak spot to be found. Many bears have started to capitulate, and while this is more a process than an event we must continue to be aware of the bogey that could halt this tremendous rally. None other than the Federal Reserve Open Market Committee.

Speediest Traders Becoming Less Welcome in Currency Markets
John Detrixhe – Bloomberg
The most aggressive high-frequency currency traders are showing signs of losing steam, suggesting platforms have succeeded at thwarting some speedy strategies. Electronic specialists are making waves by eclipsing major banks in foreign-exchange trading. But some strategies — focused on fast execution and short-term arbitrage — have reached a “saturation point,” according to the Bank for International Settlements. At the same time, platforms have adopted so-called speed bumps to blunt advantages of the savviest firms, which have been blamed for sniffing out trader intentions to bet against them.

More Stocks Joining Trump Rally Than Any Time Since 2013: Chart
Lu Wang and Luke Kawa – Bloomberg
Donald Trump’s election has fueled one of the broadest rallies in history as the number of stocks making new highs on the New York Stock Exchange climbed to the highest on a closing basis since May 2013.

***HS: Explosive rally in financials and energy have many funds playing catchup into year-end. Will be interesting to see how next quarter goes.

A Fast Thousand Points on the Dow Just Isn’t What It Used to Be
Lu Wang – Bloomberg
As it stands, the Donald Trump bull market has a shot at knocking off a dot com-era record pertaining to how fast the Dow Jones Industrial Average travels 1,000 points to a round-number milestone. But don’t be fooled, the rally remains a pipsqueak compared with past bouts of euphoria.


Nasdaq’s U.S. Equity Options Volumes Continue Upward Trajectory In November, Europe On A Decline
NASDAQ saw yet another month of impressive growth in equity options trading volumes in November. Increased volatility in the market due to the recently concluded U.S. presidential elections has possibly attracted investors’ attention to take positions in the stocks.

***HS: Option volumes in October were extraordinarily light, near 12.8M contracts/day. November average was 4M contracts higher.

Deutsche Boerse chief executive Carsten Kengeter warns London Stock Exchange could still fall through as companies await statement of objections from EU regulator the European Commission
William Turvill – City A.M.
The chief executive of Deutsche Boerse has warned “it is still not clear at all that everything will work out” in relation to the German company’s merger with the London Stock Exchange.

CME’s Duffy will get big pay raise as CEO
Crain’s Chicago Business
CME Group Executive Chairman and President Terry Duffy will get a raise along with his new CEO title next year. Duffy, 58, will see the value of his annual pay package jump by more than half to about $10 million, up from $6.15 million last year, under terms of his new employment agreement disclosed today in a filing with the Securities and Exchange Commission. That compensation includes a $1.5 million annual salary, $2.63 million bonus and an estimated equity award of $5.25 million, plus other benefits.

Regulation & Enforcement

U.S. derivatives regulator to move on from Dodd-Frank under Trump
Lisa Lambert – Reuters
The U.S. derivatives regulator will move on from reforms undertaken after the 2007-09 financial crisis to a new focus on U.S. competitiveness and the potential for shocks to the global $710 trillion swaps markets under President-elect Donald Trump. J. Christopher Giancarlo, in line to head the Commodity Futures Trading Commission once Trump is inaugurated on Jan. 20, has said the agency should look beyond mandates from the 2010 Dodd-Frank Wall Street reform law to current trends in financial markets. He counts among those cyber threats, liquidity risk, market concentration and de-globalization.

Experts warn of March variation margin deadline
Julie Aelbrecht – Futures & Options World
The March 2017 deadline for compliance with variation margin requirements in major derivatives markets will be a major challenge for many participants, experts have argued.

Sebi mulls three modes for commodity options settlement
Tarun Sharma – DNA
Markets regulator Securities & Exchange Board of India (Sebi) is evaluating three methods for settlement in the proposed option contracts in select commodities.
The Sebi-appointed Commodity Derivatives Advisory Committee (CDAC), which met last week, had failed to arrive at a decision on the method of settlement.


QT Info Systems Adds Options Functionality with CityTrader from OptionsCity
OptionsCity Software, a global provider of electronic trading solutions for professional futures and options traders, today announced that QT Info Systems, a Chicago-based market data vendor, is integrating CityTrader into its premium QT Market Center Pro front-end to help meet customer demand for advanced options functionality.

What I’ve learned building low latency systems
Ariel Silahian – Automated Trader
Software development for low latency trading tends to be shrouded in mystery. Development practices are often wrapped in layers of computational alchemy that tend to be impenetrable to outsiders. The industry rarely gives insights, even though it borrows heavily from other sectors to drive its own progress.


The On/Off Ramp, Pt 3: Making Adjustments to a Position
The Ticker Tape
The amount of time a position remains in your portfolio depends upon your objectives. Sometimes it takes days or weeks for a strategy to play out. Sometimes you might choose to close a position the very same day you entered it. Some items in your portfolio are meant to be bequeathed to your grandchildren.

How options can help stock positions
Gary Delany – TradingFloor.com
There is a tendency to see investment tools in isolation. Securities. Fixed income. Commodities. Foreign Exchange. Some people even see derivative instruments as separate tools. There is a strong case to be made, however, that options are complementary to an underlying asset position. In a nutshell, options can help change a risk profile. They can help enhance returns, protect against a downwards move, or give increased (or decreased) exposure to a specific group of stocks.

Volatility Will Come Back In A Big Way
Brandon Dempster – Seeking Alpha
I’m in the middle of writing a thesis paper for a course on hedge funds right now and one of the sections involves projecting volatility using historical precedents as a guide. The problem I’m having is that there’s no precedent for what is about to happen. A confluence of some of the global markets’ largest factors like interest rate policy direction, index valuation multiples and credit spreads are just completely different now than they were in previous periods where enough data is available to backtest. What this means is that there’s going to be more uncertainty starting late next month and that volatility will be heavily elevated.

***HS: Traders dancing the contango tango with back end vix 6 points above front.

Trading VIX Update – Shallow Dip Or Full-Blown Correction?
Seeking Alpha
Another week of record highs is in the books and the million dollar question now is what’s next. VIX index closed the week at 11.75, which is a rather benign level and 17% below last week’s close. However, Wednesday’s and Thursday’s trading was unusual because VIX/markets negative correlation broke down. Volatility went up as markets moved higher. I’ve read a couple of explanations on the issue and the most plausible in my view is that call option volatility increased pushing put option volatility higher.


Trader Q&A: How To Choose The Right Option
Trading options can be tricky, to say the least, and picking the right option is crucial to maximizing your profit potential. Whether you’re looking to buy or sell an option, there are certain things you must consider when determining which strike and series might be right. As such, I sat down with three pros — Schaeffer’s Senior Equity Analyst Joe Bell, CMT, Senior Options Strategist Tony Venosa, CMT, and Senior Trading Analyst Bryan Sapp — to discuss their tricks of the trade.


CBOE to Host 33rd Annual CBOE RMC U.S. March 8 – March 10, 2017, in Dana Point, California
Press Release – CBOE
Chicago Board Options Exchange (CBOE) will be hosting the 33rd annual CBOE Risk Management Conference (RMC) U.S., from March 8 through March 10, 2017 at the Monarch Beach Resort in Dana Point, California.
WHAT: CBOE Risk Management Conference U.S.
WHEN: Wednesday, March 8, through Friday, March 10, 2017
WHERE: Monarch Beach Resort, Dana Point, California
INFO: www.cboermcus.com
To view agendas and presentations from previous conferences, go to [[http://www.cboermcus.com/previous-conferences.html
For video interviews with speakers and blogs recapping presentations from recent conferences, go to www.cboermcus.com

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