Observations & Insight
Happy Thanksgiving and DON’T EAT THE ROMAINE!
Spencer Doar – JLN
Hope you’ve enjoyed JLN Options this week – we’re off for the Thanksgiving holiday but will be back to publishing Monday.
This week has been far from the typical “sleepy” holiday week in the States. I was anticipating a weak newscycle but, of course, why should I think past performance would indicate future results?
Instead of lethargy, the weekend yielded details on the blowup of OptionSellers, a “fund” that advocated naked options selling. It was just another lesson in probabilities. To alter an “Anchorman” quote, “Seventy-five percent of the time, it works every time.”
Markets also sold off heartily, bringing spot VIX back north of 20 (though markets today look decently green). The dynamics of the selloff led to plenty of credit, oil, volatility and trade war coverage. Crypto took it on the chin. Bloomberg also had a piece on Susquehanna – Matt Levine comments on that in his column today.
I guess the lesson here is don’t get caught sleeping off the turkey on Friday and beware thin liquidity (and an early market close).
Then there was a once-in-a-lifetime outlier — Monday Night Football’s crazy Chiefs vs. Rams game. All in all, a busy week.
Oh, and I buried the lede – ROMAINE IS BACK ON THE BADDIE LIST! After the lettuce scare in early summer, I figured we were done with our romaine problems. That was another poor assumption on my part. Yesterday, the CDC warned the populace to avoid all romaine lettuce amid E. coli concerns. So beware any Turkey Day salads.
I’ll leave you with the JFK quote STA sent out via email today:
“We are grateful for the blessings of faith and health and strength and for the imperishable spiritual gifts of love and hope. We give thanks, too, for our freedom as a nation; for the strength of our arms and the faith of our friends; for the beliefs and confidence we share; for our determination to stand firmly for what we believe to be right and to resist mightily what we believe to be base; and for the heritage of liberty bequeathed by our ancestors which we are privileged to preserve for our children and our children’s children.”
Have a good weekend everybody!
To the Cloud and Back
“The coolest thing that is happening is these financial companies and high frequency trading companies are growing to where they not only depend on our infrastructure for trading, but to run the company itself from an enterprise standpoint.”
The cloud – you’ve probably heard about it. In this video, Apcela’s Director of Solutions Architecture Hamza Seqqat talks about what financial firms are thinking about when upgrading their networks.
Watch the video and read the rest »
OCC Annual Volume Record Set
From the OCC via email
The U.S. Exchange-listed options industry sets new annual record cleared volume of 4,679,378,127 total contracts, which exceeds the previous record year of 4,562,748,194 cleared contracts in 2011.
****SD: And we still have another month to go!
Fall in VIX’s Relationship With S&P 500 Leaves Vega Underperforming
Tanvir Sandhu – BloombergQuint
An aggressive implied volatility storm has not developed amid the recent declines in global stock market indexes.
****SD: Not only is vega underperforming, but Vegas is, too. Overall visitors to Vegas (a general proxy for economic well-being – more spare cash on hand, more gambling, right?) and convention attendance are both down YoY, -1.3 and -2.7 percent respectively as of September.
As Oil Prices Plunge, What Will Swing Producers Do?
Erik Norland – CME Group
Oil options markets have rarely been more skewed to the bearish side. After a 30% plunge in spot prices, WTI put options have reached historical extremes with respect to call options prices, seen only a few times during the past decade (Figure 1). Is such bearishness warranted? The last two times puts were this expensive relative to calls, oil prices rallied by over 40% in the next two months. While there is no guarantee that oil prices won’t continue to slide, a quick look at the state of play in the world’s three big swing producers allows some insight into the recent moves and the upside/downside risks for black gold.
****SD: Yesterday Norland had Ag Options: Caught in the Fed’s Monetary Policy Vortex
Cboe Says It Shouldn’t Be Liable For VIX Manipulation
Rachel Graf – Law360 (SUBSCRIPTION)
Cboe Global Markets Inc. urged an Illinois federal court Monday to dismiss it from multidistrict litigation over alleged manipulation of the Chicago Board Options Exchange’s volatility index, known as VIX…
****SD: Folks have pointed to the CFE enforcement action with DRW as indicative of a potential blueprint VIX manipulation, but keep in mind that settlement gaming involved more esoteric vol products — VXEM, VXEW and OV futures.
Stock market volatility: Options traders expect more, more, more
Saqib Iqbal Ahmed – Reuters
A new normal is taking root in U.S. stock markets, and the word that best sums it up starts with a “V”.
****SD: Ready for yet another accompanying image of Peter Tuchman (aka the most photographed NY trader ever)?
Wall Street Speeds Up Oil’s Plunge
Catherine Ngai and Javier Blas – BloombergQuint
Banks cover options ‘negative gamma’ by selling futures; Some producers are said to be taking profits on hedges
For the second time in a week, Wall Street banks accelerated an oil plunge as they covered exposure to producers’ hedges.
S&P 500 Options Skew Shows Markets Still Calm on Tail Risks
Tanvir Sandhu – BloombergQuint
VIX is elevated, yet there’s no sign of extreme downside hedging panic on the S&P 500’s short-dated skew.
Making commodity options work for farmers
Recently introduced options trading instruments on commodity trading platforms are expected to be low-risk hedging tools for traders and farmers, while helping improve overall growth in trading volumes in the derivatives market.
However, the type of options contracts introduced are European in style, which allows “right to exercise” only on the day of expiry. This is strikingly at variance compared with options contracts traded on global commodity exchanges, which are American in nature, allowing an option holder to exercise his right to buy or sell the underlying commodity instrument anytime during the option’s life term.
Exchanges and Clearing
MIAX Emerald Options Exchange Sets February 22, 2019 Launch Date
Miami International Holdings, Inc. (MIH) today announced that MIAX Emerald will launch trading operations on February 22, 2019 , pending SEC approval. MIAX Emerald will officially join MIH’s other exchanges, MIAX Options and MIAX PEARL, as part of the MIAX Exchange Group. Specifically designed as a hybrid market model with pro rata allocation and maker – taker pricing, MIAX Emerald will serve to complement the market models of MIAX Options and MIAX PEARL and expand the MIAX Exchange Group’s trade execution capabilities into a market segment currently not offered to its member firms.
Compliance Spotlight: Joseph Adamczyk, OCC
Jan Michael Dervish – Inside Compliance, Loyola University Chicago School of Law
Joseph Adamczyk, ’01 is the Senior Vice President and Chief Compliance Officer at OCC (Options Clearing Corporation). OCC is the world’s largest equity derivatives clearing organization, and works to promote stability and financial integrity in the marketplace. Mr. Adamczyk holds a J.D. from Loyola University Chicago School of Law, an MBA from the University of Chicago, and a B.S. in Business Administration from DePaul University.
****SD: Go Ramblers! (So far Loyola’s b-ball team is 4-1.)
Regulation & Enforcement
FINRA Reminds Firms of Exercise Cut-Off Time for Options Expiring on the Friday After Thanksgiving
The national options exchanges are closing at 1:00 p.m. Eastern Time (ET) on Friday, November 23, 2018 (the Friday after Thanksgiving), which will modify the exercise cut-off time for expiring options. FINRA reminds firms that pursuant to FINRA Rule 2360(b)(23)(A)(viii), if a national options exchange or The Options Clearing Corporation announces a modified time for the close of trading in standardized equity options, then the deadline for an option holder to make a final decision to exercise or not exercise an expiring option will be 1 hour 30 minutes following the time announced for the close of trading on that day instead of the 5:30 p.m. ET deadline. Accordingly, option holders must make a final decision to exercise or not exercise options expiring on November 23, 2018, by 2:30 p.m. ET.
****SD: Given how often exercising options — you know, cardio and the like — is the root of the beef between clients and brokers, I imagine this will lead to some misunderstandings.
Themis Trading Blog
Since SEC Chairman Jay Clayton and Division of Trading & Markets Director Brett Redfearn took over last year, the SEC has been doing a tremendous amount of market structure work. While the tick size pilot and the proposed access fee pilot have received a lot of attention, there are other pilots that the SEC is reviewing. Earlier this year at an STA event in Chicago, Brett Redfearn said that there are currently 17 pilots being run out of the Division of Trading and Markets.
Hard Brexit: An Impact Assessment for US Market Participants and Entities Registered with the CFTC
This document highlights the issues that must be addressed in the case of a ‘hard’ Brexit. Specifically, it: -Identifies exiting US Commodity Futures Trading Commission (CFTC) equivalence determinations and no- action relief that is currently provided to the European Union (EU) and should be extended to entities registered with the CFTC in order to preserve continuity and market stability once the UK exits the EU. -Analyzes the impact of a hard Brexit on U S market participants, and where appropriate, proposes regulatory and contractual solutions to minimize any negative impacts a hard Brexit would have on US market participants
As Credit Fears Snowball, Hedge Fund Places Short-Volatility Bet
Yakob Peterseil – BloombergQuint
Credence Capital sells put options on largest high-yield ETF; Volatility premium highest since Feb. – Couletsis at Credence
A hedge fund is placing a risky wager equivalent to 11 percent of its volatility portfolio that the fear gripping global debt markets will prove short-lived.
****SD: It’s a wee bit unclear to me if this fund is selling puts or put spreads. Either way, it’s a strategy only possible because of the rise in liquid credit ETFs. (That is a reference to the liquidity of the ETF, not necessarily a comment on the liquidity of the underlying – how that dynamic will play out in a time of extreme market stress is still debated.) For more on credit, see CNBC’s $9 trillion corporate debt bomb is ‘bubbling’ in the US economy
Equity Rout Comes as Options Investors Pull Back Bearish Hedges
Gregory Calderone – BloombergQuint
As U.S. equity investors endure yet another sell-off that’s wiping out the major indexes’ gains for the year, options traders have been reducing their use of put contracts as protection against further declines.
Founder of Stricken Hedge Fund Promoted Naked Option Selling
Naureen S Malik, Isis Almeida and Marvin G Perez – BloombergQuint
Optionsellers.com’s James Cordier wrote book on options trade; Some of firm’s accounts held naked options positions: lawyer
James Cordier was a long-time proponent of using “naked” options to trade in the volatile energy market. In numerous articles and even a book, he touted the potential rewards, telling investors they can produce consistent results. Now it turns out that style of investing may have been at least partially behind the collapse of Cordier’s Florida hedge fund, Optionsellers.com.
****SD: Getting spanked hurts more if you’re naked.
OptionSellers “Strategy” Claims Another Victim
Mark Melin – ValueWalk
Perhaps one of the most well-known “secrets” in the managed futures CTA industry is the risk associated with the un-hedged “naked” short-selling option strategy. Author and registered Commodity Trading Advisor James Cordier of OptionSellers.com was the latest causality of a strategy known to “capsize the boat,” resulting in a dramatic loss for clients invested in the strategy.
****SD: The obituaries continue. TL;DR – it worked ’til it didn’t.
Larry Kudlow says there’s no recession in sight
President Trump’s top economic adviser Larry Kudlow said Tuesday that stock market corrections “come and go” and that the economy is on solid footing: “My personal view, our administration’s view, recession is so far in the distance I can’t see it.”
****SD: Kudlow wears glasses – were they on or off when he said this?