Volatility Traders Abandon VIX Bets as Stock Conviction Vanishes

May 20, 2020

Observations & Insight

Maureen Obermeier: Open Outcry Traders History Project

Maureen Obermeier started on the CBOE floor the summer after her freshman year of college and never left. She helped some friends get jobs that summer, and some, like her, stayed and built careers in the markets. She became a CBOE member when she turned 21 and filled orders. She sat for an interview with John Lothian News for the MarketsWiki Education Open Outcry Traders History Project to tell her story, which includes meeting her husband on the trading floor and building a business with him. Chess and Maureen Obermeier knew they were in the right place at the right time, on the floor of the brand new Chicago Board Options Exchange as the exchange traded options business developed. Here is her story.

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Lead Stories

Volatility Traders Abandon VIX Bets as Stock Conviction Vanishes
Yakob Peterseil – Bloomberg
Some of the most speculative stock players are jettisoning bets on whether the U.S. market will be driven by fear or greed in the coming months.
As Wall Street frets a rally defying economic gravity, long and short exposures among non-commercial investors on the Cboe Volatility Index have sunk to near multi-year lows, according to the latest CFTC futures data.

Risk Is Misunderstood by Many Investors, Says VIX Pioneer
Yakob Peterseil – Bloomberg
Volatility has always been a feature of markets. In a 1989 research paper, Dan Galai, along with Menachem Brenner, proposed creating an index—which they called Sigma—to track the volatility of stocks. That research eventually helped inspire Chicago Board Options Exchange (now Cboe Global Markets Inc.) to create the VIX, known as Wall Street’s “fear gauge.” (There remains disagreement over how much credit their research deserves for the index.) Born in Jerusalem, Galai earned his Ph.D. at the University of Chicago before embarking on a career that included serving as dean of the Hebrew University of Jerusalem’s business school and founding Sigma Investment House. In April he spoke to Bloomberg about his career, the research around volatility, and what interests him today.

Extreme Behavior Is on Display Everywhere in the Stock Market
Sarah Ponczek – Bloomberg
Rare readings emerge in options trading, valuations, volume; After 32% S&P 500 rally, investors contemplate what comes next
It took 33 days for stocks to drop 34%, and three weeks to gain half of it back. Whiplashed investors have been thankful for a dose of calm, but signs are emerging the lull may not last. The clues are evident across options markets, in surging share volume and in widening daily price swings, among other places. Frantic positioning and extreme readings in market internals show that while the S&P 500 has been nestled in a trading range for four weeks, investors remain anything but settled.

******Extreme is the new normal.~JJL

BofA Warns of Volatility-Shock Risk Due to Market Fragility
Joanna Ossinger – Bloomberg
Investors need to guard against violent price swings as markets become increasingly fragile, according to Bank of America Corp.
Fragility has increased due to high-frequency traders shutting down machines as stress rises, which hurts liquidity, as well as by trend-chasing among investors reaching for better returns “against their better judgment in a world addicted to the central bank put,” BofA strategists led by Nitin Saksena wrote in a note May 19. That’s also created “a massive log-jam for liquidity” when things go sour, as players with little conviction rush for the exits, they said.

Inside Volatility Trading: May 19, 2020
Kevin Davitt – Cboe
It’s been said countless times and there are constant reminders, but as Fed Chair Jerome Powell remarked on May 13, we’re living through a period “without modern precedent.” We’re two months removed from nearly nationwide stay-at-home orders. The most populous county in the United States (LA County) recently extended their shelter in place mandate until the end of July. Large portions of the global economy are either shut in or severely impaired. We’re also three months removed (to the day) from the all-time highs in the S&P 500 Index.

Deribit’s Bitcoin Options OI records fresh high by climbing to $1B
Chayanika Deka – AMB Crypto
Bitcoin Options have been on the rise lately. This market has for a long time been dominated by Deribit, with the platform shooting up to a newly recorded Open Interest of $1 billion on 19 May. According to the crypto-analytics platform, Skew, the figures were consistently increasing in tandem with Bitcoin’s price action.

Negative Vix premium signals vol spikes, research finds
Rob Mannix – Risk.net
Investors betting on market calm might want to pay closer attention to the premium in futures contracts linked to the CBOE Volatility Index.
Vix futures typically trade at a premium to the index but inexplicably cheapen ahead of bouts of volatility, new research from Ing-Haw Cheng, a professor at Dartmouth College’s Tuck School of Business, reveals.

Exchanges and Clearing

Masks and shields, microphones, scanners, contact tracers: How Wall Street trades again amid coronavirus
The Philadelphia Inquirer
Nasdaq plans to reopen its only live securities-trading floor, in the FMC Tower above the Schuylkill in University City, on June 1.
The move comes 11 weeks after the New York-based global trading network darkened its offices and shifted stock-options trading from the sometimes-lively “crowd” in the 6,000-square-foot tower trading floor to an automated center in South Philadelphia, and then to traders’ home networks, as Wall Street adjusted to working in the midst of the coronavirus.


These Fallen Angel ETFs Could Lift Your Portfolio
Rich Blake – Barron’s
At the end of 2019, the market value of on-the-cusp-of-junk BBB bonds had ballooned to $3.7 trillion, up from $2.3 trillion five years earlier, and investors had begun to worry that any bit of bad economic news could prompt a rash of downgrades.
Then the coronavirus struck.
In March and April, the economic toll of the global pandemic resulted in 36 companies, including Occidental Petroleum Corporation (OXY) and Ford Motor Co. (F), having their credit ratings lowered from investment grade down to junk. The bonds of these “fallen angels” represent more than $140 billion worth of issuance from more than 28 companies, according to Barclay’s Capital, more than we’ve seen in any calendar year. They also represent a buying opportunity for intrepid investors.

Bitcoin Options Market Data Shows Mere 9% Chance BTC Reaches $20K in 2020
Activity in the Bitcoin options market shows BTC has a 9% chance of reaching $20,000 by the end of 2020.
The Bitcoin (BTC) options market, which is mostly dominated by Deribit and CME, gives a 9% chance for BTC to rise to it’s all-time high at $20,000 by the end of 2020.
Given the tendency of Bitcoin to see a prolonged rally six to eight months after a halving is activated, traders in the options market are relatively cautious about the medium-term trend of BTC.


CBOE & RCM Alternatives Present: Navigating Market Volatility Webinar
Thu, May 21, 2020 3:00 PM – 4:00 PM CDT
• How crazy volatility was during March/April.
• Why the VIX is more than just for tail risk.
• Is it too late for long volatility protection?
• Why straddles & strangles?
• What everyone gets wrong about options.
• The volatility landscape looking ahead.

Special derivatives insider trading considerations and risk reduction techniques during a pandemic
21 May 2020 • 10:00 AM – 11:00 AM ET • Webinar
In the current pandemic environment, high derivatives volatility levels often associated with breaking news of medical and therapeutic developments, as well as the availability and scope of government relief, stimulus and economic reopening programs have raised special insider trading issues for traders and asset managers. This webinar will identify current key concerns of regulators and prosecutors, with a special focus on the types of relationships and non-public information that may be most vulnerable to abuse —and most scrutinized by the authorities. The panelists will also discuss hypothetical trading scenarios that would risk attracting scrutiny from regulators and prosecutors in the current market conditions, and will suggest certain risk mitigants especially adapted to the current situation.

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