Breaking News

There’s one big trading company that’s loving all this uncertainty (CBOE); Buying Into the Turmoil: Investors Embrace the Risks; The VIX Is Broken, But Does It Matter?

Observations & Insight

Options Industry Conference Update: Congress Continues To Push For Avoiding Unintended Consequences in Tax and Dodd-Frank reforms
By Jim Kharouf and Jeff Bergstrom, JLN

The 35th Annual Options Industry Conference kicked off on Wednesday with a major focus on Washington, especially on a host of new proposals on tax and Dodd-Frank reforms.

The conference, hosted by Intercontinental Exchange’s NYSE in Scottsdale, Arizona, led with an interview with Congressman Tom Reed (R-NY 23rd District) who outlined initiatives to address tax reform in 2017. Reed told OCC’s Executive Chairman and CEO Craig Donohue that the tax reform may have enough support in Congress to get it passed this year.

As it pertains to the financial industry, Reed said one of the goals of a new tax structure is to avoid unintended consequences. A previous tax reform proposal from former Congressman Dave Camp (R-MI 4th District) had been considered negative for the options industry. Now, Reed said some simple adjustments could go a long way toward avoiding major consequences. He said using dynamic scoring rather than static scoring on tax proposals would raise revenues with more realistic outcomes. Dynamic scoring takes into account the broader behavioral effects of a tax rather than simply plugging in a tax and calculating revenues.

Read the rest of the Washington Outlook here

Notes: Options Industry Conference: Exchange Highlights For Each US Options Exchange
Jim Kharouf, JLN

Each year at the Options Industry Conference, each exchange gets five minutes to talk about highlights for their respective market. Here are some notables:

BOX is still hoping to launch its new trading floor in the CBOT building soon, pending regulatory approval

CBOE extended its trading hours, which is attracting new customers, specifically hedge funds.

MIAX has applied for a new CFTC-regulated clearing house and SEF for options on digital currencies such as bitcoin and others, called LedgerX.

Nasdaq will finish the ISE integration by the end of this summer and launched a new trading floor for PHLX in April in Philadelphia with windows.

NYSE Options upgraded its technology and reduced the speed of execution by 50 percent. It also has a new instant messaging technology called Imprint that allows for order entry using its YellowJacket IM system.

Lead Stories

There’s one big trading company that’s loving all this uncertainty (CBOE)
Joe Ciolli – Market Insider
The stock market hasn’t been this dead in 24 years, but there’s still plenty of money to be made in investment products that bet on price swings. Just ask CBOE Holdings, the world’s largest provider of volatility instruments, which smashed first-quarter earnings expectations on Tuesday due largely to investor appetite for wagers on the firm’s proprietary index, also known as the VIX.
jlne.ws/2qwTc2I

Buying Into the Turmoil: Investors Embrace the Risks
Landon Thomas Jr. – The New York Times
Buy the dip. Be it stocks, bonds or more complex derivative bets, investors following this Wall Street maxim have reaped robust rewards in recent years. Such buying has been evident in the shares of large American companies since March 2009, when the Standard & Poor’s 500 stock index touched a low of 666. (It closed on Wednesday at 2,399.63.)
jlne.ws/2q7HPgh

The VIX Is Broken, But Does It Matter?
Seeking Alpha
It has been 6 months exactly since the U.S. election. Over this 6-month period, the VIX has had a mean reading of 12.13. The next closest period to today was the 2013 buying frenzy, but the average VIX reading was nonetheless significantly higher at 14.49. Some suggest that the VIX has been hijacked and no longer works. Others say that the VIX is based upon flawed mathematics. Mark Mobius of Templeton has another explanation for the low volatility in stocks.
jlne.ws/2q6obBE

The Secretive Firm Set to Expand in Retail Options: Two Sigma Securities
Deal for Interactive Brokers Group’s options business is crafted to push firm into the big leagues
By Alexander Osipovich – The Wall Street Journal
As the high-speed trading industry endures a wrenching period of consolidation, Two Sigma Securities is looking to come out on top.
The secretive firm, an affiliate of the $45 billion quantitative hedge fund Two Sigma Investments, said this week it had agreed to buy the global options market-making business of Interactive Brokers Group Inc., which helped pioneer electronic trading in the 1980s.
/goo.gl/yYBS2m

Relax—the ‘fear gauge’ is doing exactly what it’s supposed to be doing, expert says
Rebecca Ungarino – CNBC
The CBOE Volatility Index appears to be playing a game of limbo. How low can it go? Just this week, the VIX hit its lowest level in 10 years amid a relatively muted stock market. Arguments are swirling around the significance of the index and whether it’s a reliable gauge of the market’s anxiety.
jlne.ws/2q7IcaH

U.S. Equities Little Changed as VIX Drops After Comey Ouster
Oliver Renick – Bloomberg
U.S. stocks were little changed following President Donald Trump’s firing of FBI director James Comey. The S&P 500 lost 0.1% to 2,394 at 10 a.m. in New York, as investors assessed earnings reports. The benchmark closed little changed in the past two sessions after better-than-forecast payrolls helped send it to a record last Friday. The Dow Jones Industrial Average declined 51 points to 20,925 on Wednesday.
jlne.ws/2r6nHtn

Cerulli Study Says Financial Advisors Who Currently Use Options Expect to Increase Use of Options by 30 Percent in Three Years
Press Release – OCC
The Options Industry Council (OIC), an industry resource funded by OCC and the U.S. options exchanges, today announced the results of a study, How Financial Advisors Use and Think About Exchange-Listed Options, which found that approximately one-third of financial advisors currently use options in 20 percent of client portfolios, and that usage is expected to increase by 30 percent in the next three years. The goal of the study, conducted by Cerulli Associates, a global research and consulting firm specializing in asset management and distribution trends worldwide, is to identify target audiences and educational strategies for the OIC that may lead to increased adoption of exchange-listed options strategies among financial advisors.
jlne.ws/2qwMQjE

***JB: Emily Sweet, the Cerulli senior analyst who spoke about this at the OIC conference, mentioned a variety of means to increase the use of options but perhaps lead among those is technology. Financial advisors adverse to using options worry about the time commitment it takes to trade them, and technology can go a long to way alleviating that sticking point. Education also figures large.

Booming Growth Stocks and the Bear Case on the U.S. Economy
Lu Wang – Bloomberg
Things are looking great for equities. Right? Before today’s plunge, hardly a day went by without another record. The S&P 500 Index has closed at an all-time high 16 times in 2017, its 7 percent advance through Wednesday led by chipmakers and Internet companies with the fastest earnings growth.
jlne.ws/2poQlZr

Exchanges and Clearing

BRIEF-CBOE Holdings files for non-timely 10-Q
May 11 CBOE Holdings Inc:
* Files for non-timely 10-Q – SEC filing
* Cites complexity of certain accounting matters related to integration of bats global markets’ financial information in connection with merger Source text – (bit.ly/2r3Itc9) Further company coverage:
/goo.gl/ZJc1TR

SPDR S&P 500 ETF Trust Sees Unusually Large Options Volume (SPY)
Posted by David Glaser on May 11th, 2017 // No Comments
SPDR S&P 500 ETF Trust (NYSE:SPY) was the target of some unusual options trading on Friday. Investors bought 1,308,064 call options on the stock. This represents an increase of 110% compared to the average volume of 622,308 call options.
/goo.gl/zru0DJ

Strategy

SPXW Weekly Options A.D.V. Rises above 500,000, as 3rd Friday SPXW Options Now Are Available
By Matt Moran
This week I received inquiries about the trends in options volume.
The large-sized SPXW Weekly options have successfully seen volume growth over each the past seven years. Key points about SPXW Weekly options include –
VOLUME. Average daily volume (a.d.v.) in the first four months of 2017 was 500,964 contracts, (up 30% over the a.d.v. for the full year of 2016; see Exhibit 1 below);
MANY EXPIRATIONS. SPXW Weeklys options have expirations on ten upcoming dates in May (see Exhibit 2 below);
/goo.gl/lVf3EN

Swim Lessons: Spreading Your Trading Wings With Iron Condors
By Kevin Hincks, Co-host, Swim Lessons, TD Ameritrade
Editor’s note: In this week’s Swim Lessons column, Kevin Hincks explains the basics of an Iron Condor. TD Ameritrade clients can join Swim Lessons in the thinkorswim platform on Thursday May 18th at 10:30 AM CT when the team discusses Iron Condors.
In our daily educational program, Swim Lessons, we seek to teach options traders about risk-defined, high probability options trades. In past columns, we’ve covered buying vertical spreads and selling vertical spreads.
/goo.gl/2mbtHC

Market Has a Long History of Disinterest in Politics
By Helene Meisler – The Street Real Money
There has been so much political chatter in the last few days, and the one constant theme I see is how folks are astonished that the market doesn’t go down on whatever happens in Washington, D.C. I would like to remind everyone that back before President Trump was inaugurated, I wrote about the market and politics and showed that even during the Nixon years it took a hiking Fed to move the market lower.
And heck, all that political chatter managed to take everyone’s eyes off the VIX. Oh yes, remember the VIX?
/goo.gl/DaO84O

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About Author

Rudolph is the managing editor and head of editorial operations at John Lothian News (JLN).