OptionSellers Fallout Continues; Cheap Black-Swan Hedges

Nov 30, 2018

Lead Stories
Ohio law firm preps claims for Tampa investment firm clients who lost millions
Crystal Owens – Tampa Bay Business Journal (SUBSCRIPTION)
A law firm representing several clients of OptionSellers.com is preparing to file loss recovery claims on behalf of 85 individuals.
/goo.gl/7jWp1E

****SD: It’s also bringing a case against INTL FCStone. From attorney James Albin regarding INTL FCStone – “The firm could easily have foreseen and prevented the devastation of OptionSellers’ client account if the fiduciary oversight responsibility had been fulfilled.” And it’s not the only firm representing aggrieved former OptionSellers clients. If you Google OptionSellers the first few sponsored results are law firms soliciting clients.

Broker Seeks Millions From Wiped-Out OptionSellers Clients
Marvin G Perez and Simon Casey – Bloomberg
FCStone seeks $35.3 million after liquidating client accounts; Exposure to losses not yet determined, FCStone says in filing
For investors wiped out by OptionSellers.com’s disastrous trading in the natural gas market, the ordeal isn’t over, as a brokerage that handled their accounts pursues them for millions of dollars.
/bloom.bg/2E5IlU8

****SD: You gotta make that legal team earn their keep, right? More on OptionSellers in the Forbes story below.

Black-Swan Hedges Cheapest Since 2016
Yakob Peterseil – Bloomberg (SUBSCRIPTION)
CBOE’s option skew suggests speculators crowding out hedgers; Phenomenon may show ‘higher chance’ for large upside move – MRA
The cost of hedging against tail risks in U.S. stocks has plummeted, suggesting bulls are back after the goriest month since 2011.
Implied volatility for put options on the S&P 500 Index is sinking relative to call contracts, sending the CBOE SKEW Index — which purports to measure expectations of a tail event — to its lowest in more than two years.
/bloom.bg/2E5HFhy

Robinhood and Payments for Order Flow
Paul Rowady, Alphacution – TABB Forum
Recent revelations that a big portion of Robinhood’s revenues are derived from payments for order flow got Alphacution’s Paul Rowady thinking about how valuable retail order flow is likely to be to the brokers that make these payments. Here, he breaks down the numbers.
bit.ly/2E7Loey

****SD: Forget payment for order flow (PFOF), Robinhood doesn’t pay interest on cash balances and that’s probably making them boatloads more than PFOF. I have a piece that will soon roll out that partially addresses this topic.

An Early Look Back at 2018
Talton Capital Management – Highly Evolved Vol
2018 hasn’t been a good year for volatility funds.
In February there was a feedback driven catastrophe in the implied volatility space. The details are less important than the result. A lot of volatility funds lost more than 30% in the month and one of the largest funds lost over 80% in a day.
bit.ly/2E7PJOS

****SD: From the article: “There absolutely is a variance premium. Implied volatility is on average over-priced. But ‘on average’ is very different to ‘always.’ And most volatility funds do nothing more than sell and hope. That isn’t worth paying 2/20 for. It isn’t even worth paying 0/0 for. If you are investing in the volatility space, ask your manager if they forecast volatility, how they forecast volatility, if they view implied volatility as a separate risk and if they are ever un-hedged.”

Recent Hedge Fund Implosion Offers Lessons For Everyday Investors
Michael Cannivet – Forbes
Imagine if your investment manager not only lost all your money, but on top of that, you owed additional money. That’s the brutal reality facing one group of investors.
/goo.gl/85wpEX

****SD: I take exception to the number of people calling it a “hedge fund” even if it technically is one — it feels wrong. The majority of hedge funds DO offer separately managed accounts but how often are investors left owing an FCM money based on a hedge fund’s losses? How many hedge funds go by their website name? (“Oh, yeah, I’ve got a big allocation with SteveCohenMoneyMaker.com.”) How many hedge fund websites look like “a Cialis commercial”? That link is to the Epsilon Theory blog about the blowup.

December blizzard of risk events for markets
Ritvik Carvalho – Reuters
This year has been a bumpy one for global financial markets, but before investors can turn their attention to 2019 they must first get through December, which is packed full of event risks.
/reut.rs/2E6ecnC

****SD: Also from Reuters – Trump-Xi meeting puts stock market on edge and more from MarketWatch – Watch out for December ‘risk liquidation’ in markets if Trump meeting with Xi is a bust

Hong Kong regulator working to widen fund distribution
International Adviser
The Hong Kong Securities and Futures Commission (SFC) is aiming to diversify fund distribution channels, which have been for years dominated by the banking sector, Ashley Alder, chief executive of the watchdog, said in a speech during the HKSI Institute Roundtable Luncheon this week.
bit.ly/2E6wMfu

****SD: Included for this tidbit from Hong Kong regulator Ashley Alder – “It means enabling international access to mainland-related futures and options, as well as the development of mainland-related equity, currency and fixed income derivatives, which mainland and global investors can access in Hong Kong.”

Exchanges and Clearing
CME loses vote to shrink board of directors
Lynne Marek – Crain’s Chicago Business
CME Group’s legacy traders decided in a vote tally today that $10 million for their six seats on the Chicago company’s board wasn’t a good trade.
CME, which operates the biggest futures trading market in the world, failed to win support for a proposal that would have eliminated the right of its B shareholders, who are mainly long-time traders, to elect six directors. It sought the change to reduce the size of its relatively large 21-member board, to streamline governance and cut costs.
bit.ly/2E7xUPI

China’s Dalian Commodity Exchange launches swap trading
Reuters
China’s Dalian Commodity Exchange (DCE) said on Friday it launched swap trades, seeking to offer more hedging tools to investors, without specifying which products will be eligible for the trading.
That came after the bourse opened its flagship iron ore futures trading to overseas investors in May and said to launch options on the steelmaking ingredient next year, challenging its rival in Singapore as a global trade centre of bulk commodities.
/goo.gl/n9stFN

****SD: Included for the steel derivatives recap.

SGX Bull Charge raises more than $3.3 million for charity in 2018, highest amount in over a decade
SGX
Singapore Exchange’s (SGX) flagship charity initiative Bull Charge held its annual Charity Run today, rallying the financial community to another successful year of fundraising with more than $3.3 million in proceeds, the highest amount in over a decade.
bit.ly/2E5BLwL

Regulation & Enforcement
FIA offers recommendations for CFTC and SEC harmonization
FIA
On Nov. 29, FIA submitted a letter to the Securities and Exchange Commission and the Commodity Futures Trading Commission proposing several areas where the agencies could coordinate and harmonize their regulatory programs for cleared derivatives. FIA focused in particular on simplifying rules that apply to firms that are dually registered as futures commission merchants with the CFTC and as broker-dealers with the SEC. These areas include record-keeping, reporting, margin rules, and oversight of products subject to both agencies’ authority. FIA also proposed codifying certain exemptions for security-based swaps.
bit.ly/2DFKEwQ

SEC to explore changes for quarterly earnings reports after Trump request
Gabriel T. Rubin – MarketWatch
Securities regulators plan to explore changes for public companies’ quarterly earnings reports, following President Trump’s summer request for them to take up the issue.
The Securities and Exchange Commission on Thursday said it would vote next week on asking companies and investors for feedback on the “nature and content of quarterly reports and earnings releases.”
/on.mktw.net/2E7YAQF

Technology
FCA says reported technology outages at firms has more than doubled
Hayley McDowell – The Trade
Technology outages at financial institutions reported to the UK’s regulator has more than doubled over the past year, according to its executive director of supervision.
bit.ly/2E4JJ9r

Strategy
Goldman Sachs has formulated these low-risk, high-reward trading strategies to help investors profit from the G20 summit
Joe Ciolli – Business Insider Prime (SUBSCRIPTION)
Goldman Sachs has formulated these low-risk, high-reward trading strategies to help investors profit from the G20 summit
/goo.gl/9UEtQV

****SD: Goldman recommends buying calls on a list of 21 stocks, 10 of which are in the semiconductor business.

The Market Is Rallying. So Why Is the VIX Still So High?
Ben Levisohn – Barron’s
The Dow Jones Industrial Average has gained more than 1000 points this week and could be on course for a fourth day of gains. Given that situation, we’d expect volatility to fall meaningfully. Instead, The Cboe Volatility Index, or VIX, is still elevated. What gives?
bit.ly/2E8QF5m

Finding the right strategy for the Asian markets
Thomas Book – Eurex
Coming back from a short trip to Singapore, attending FIA Asia, I was thinking about the variety of impressions I once again got from this amazing, not easy to grasp part of the world. It already starts with the fact that what we, simply out of convenience, call Asia does not really exist. Instead, we have many individual markets with different challenges and opportunities.
bit.ly/2BInXGk

Big Twitter Options Bet Sees Shares More Than Doubling by 2020
Gregory Calderone – Bloomberg
As today’s sell-off in Twitter Inc. pushed the shares toward their worst November since 2015, someone in the options market was betting big that the social-media stalwart was on track for a major comeback.
/bloom.bg/2E7zC3A

****SD: Wow.

Why Options Strategist Sosnick is ‘Selling the Rallies’
Bloomberg (VIDEO)
On this edition of “Options Insight,” Interactive Brokers’ Steve Sosnick discusses his options strategy with Bloomberg’s Abigail Doolittle on “Bloomberg Markets: The Close.”
/bloom.bg/2E5ilbv

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