Breaking News

Big FX bets bunched around Jackson Hole meeting; Options trader gets 1.5 years in prison; VIX Options Volume Record

Observations & Insight

No, Not the VIX – the VSTOXX
Sarah Rudolph – JLN

Even your dog has heard of the VIX, the Chicago Board Options Exchange‘s benchmark volatility index, but the VSTOXX, the benchmark for volatility in European stocks, is less of a household name in the U.S. Eurex has been trying to change that by adding more and more functionality to their VSTOXX products, starting out with spot prices and futures contracts on the index and then more recently moving into options on futures and ETNs.

Yesterday, Eurex and Rival teamed up for a meetup in Chicago at a popular Randolph Street restaurant to share the latest about VSTOXX and Rival Systems‘ offerings. Mark Shore of Shore Capital Research was engaged to give an update on the VSTOXX based on his research into the subject.

VIX is the go-to measure for volatility in the U.S., but “VSTOXX is a better proxy than the VIX for European volatility,” Shore said. Rival Systems, a trading systems and technology provider that launched in 2015, last year added access to Eurex products on its Rival Trader platform.

Shore said VSTOXX derivatives are ideal for hedging, trading short term moves, doing spreads between futures on VSTOXX and VIX, and deploying strategies that use both futures and options.

The VSTOXX measures the 30-day implied volatility of the EURO STOXX 50. VSTOXX derivatives settle in euro. The index has a negative correlation with equities, and tends to move somewhat more than the VIX, Shore said.

Eurex had offered options on the spot VSTOXX (OVS) but that was limited to US market participants who are a Qualified Institutional Buyer. In February of this year the exchange started offering options on the futures (OVS2), which opens up participation to individuals as well. And just a few weeks ago it introduced exchange-traded notes, rounding out its suite of VSTOXX-related products and giving its customers more functionality to trade a whole range of derivatives on the index, including options on the VSTOXX-VIX spread.

Rival Systems does not yet offer an autospreader for this functionality, but its CEO, Rob D’Arco, says one is in development. D’Arco also said Rival has benefitted in the short term from the recent news of Vela Trading Technologies’ acquisition of OptionsCity Software, noting that uncertainty over their strategy has encouraged options traders to take a look at Rival’s offerings.

Lead Stories

Big FX bets bunched around Jackson Hole meeting next week
About $45 billion of currency options on the euro-dollar exchange rate are expiring in the three days leading up to the annual central banking symposium in Jackson Hole next week.
While the spike in the quantum of options struck is not unusual by this year’s standards with $23 billion of currency options alone expiring on Thursday, it is certainly unusual by August standards on a historical basis, according to Thomson Reuters data stretching back for the last two years.

Ex-Eaton Vance Corp trader gets 1.5 years in prison for fraud
Nate Raymond – Reuters
A former Eaton Vance Corp (EV.N) portfolio manager was sentenced to 1-1/2 years in prison on Wednesday for engaging in a fraudulent options trading scheme that prosecutors said had netted him more than $1.5 million in profits.

****SD: The judge’s point: “People in your business are going to be paying attention to this because they have the same temptations every day,” Talwani said. Another options enforcement story in “Regulation.”

CBOE Vest Technologies and The Options Industry Council (OIC) Offer Options Strategy Builders Tool
PR Newswire
CBOE Vest Technologies, a software company enabling users to work with target outcome investment strategies, and the Options Industry Council (OIC), a provider of unbiased options education, are working together to educate investors and broaden the appeal of options with a new online tool, The Options Strategy Builders.

The VIX Options Volume Record That Might Surprise You
Elizabeth Harrow – Schaeffer’s Research
After last week’s short-lived — but dramatic — stock market sell-off, a couple of the options trading indicators we track here at Schaeffer’s have registered noteworthy extremes. And while it’s not particularly shocking to see that equity put option volume has approached election-era highs, you might be surprised to see how traders have been playing VIX options.

****SD: VIX popping today on the news of, well, everything, unfortunately: Cohn rumors, Charlottesville fallout, Barcelona attack. Guess people who doubled down on bearish vol bets are a bit squeamish today. We were into the 15 handle briefly today after closing at 11.74 yesterday. In mid 14s as of this writing.

Vix Short-Term Futures Leads To A Rollercoaster Ride For Traders
Mark Melin – ValueWalk
When the CBOE VIX index spiked from near 11.6 on August 10, to over 17 on August 11 and then back down to touch 11 on Tuesday, August 15, amounting to an amazing roller coaster even for the “fear gauge” known for its mean reversion tendencies. S3 Partners Ihor Dusaniwski, managing director of the financial analytics firm, notes the rather large short exposure in the VIX exchange traded notes (ETN) market that are driving the sharp mean reversion and points to where the profitable trades in this index have been year to date. Hint: money has not been made being long volatility.

Good Reasons to Dismiss Market Fears, For Now
Mohamed El-Erian – Bloomberg
Risk assets across the globe, despite already high valuations, have recovered impressively from a sell-off triggered by concerns about a North Korean nuclear attack. In doing so, they have again highlighted the extent to which traders and investors — highly confident about the environment they operate in (be it economic, financial or institutional) — have developed endogenous stabilizers.

Most Fed officials support a move towards unwinding the $4.5 trillion balance sheet at ‘an upcoming meeting’
Akin Oyedele – Business Insider
Most Federal Reserve officials supported a move towards unwinding the Fed’s massive balance sheet at “an upcoming meeting,” according to minutes of its July policy meeting released Wednesday.

****SD: Also see NY Times’ Fed Officials Confront New Reality: Low Inflation and Low Unemployment

Exchanges and Clearing

Deutsche Börse probe widens to all of top management
Philip Stafford – Financial Times
Investigations of Deutsche Börse’s chief executive have widened to examine the “reliability” of all of its top management, threatening to engulf the board and hobble its efforts to move on from its failed deal with the London Stock Exchange Group.

Regulation & Enforcement

Insider trading ring exposed by SEC
Hayley McDowell – The Trade
Seven ‘inexperienced’ traders have been charged with criminal offences by US authorities after making millions in profits from insider trading.
The Securities and Exchange Commission (SEC) found confidential information on several imposing mergers and acquisitions was used between 2014 and this year for illicit trading activities.

****SD: Press release from SEC here and Bloomberg’s Matt Levine has more on the insider trading in his morning column.


Bill Ackman makes bet on stock market turmoil due to geopolitical risk
Tae Kim – CNBC
Billionaire hedge-fund manager Bill Ackman revealed he bought protection against a stock market drop due to rising geopolitical risk.
Ackman said the firm took a “small position” in out of the money call options on a volatility index during Pershing Square Capital Management’s second-quarter conference call Wednesday.

Consider Covered Calls for Low Volatility Situations
The Ticker Tape
When summer trading is slow, and everyone’s either at the beach or wishing they were, implied volatility (IV) can get pretty low. For covered call sellers, lower IV means bringing in less premium. That doesn’t mean you have to give up your covered call strategy altogether, nor does it mean you have to live with lower premiums. But it might require a shift in your thinking, and perhaps your strategy.

S&P 500 Seasonality Stirs As Bearish Catalysts Abound
Seeking Alpha
It’s very timely to take another look at stock market seasonality. The brief panic last week (barely a 2% selloff) actually came at a moment where seasonality has turned to an increasingly negative bias. The seasonally bearish bias peaks in later September to early October. So it’s fair to say that all else equal, the risk of a correction or further selloffs are at elevated levels over the coming weeks and months. Having a solid investment process and analytical system (indicators, framework, etc) to know what to do, should a correction come, will be key.

Beware…Commodities Are A Little Too Quiet
Callum Thomas –
I noticed something in the commodity charts, or perhaps you could say I noticed something that wasn’t in the commodity charts. In other words, commodities have been looking fairly quiet, a little too quiet. After putting in a bearish breadth divergence signal breadth has washed around a bit, still at quite weak and indecisive levels. Yet looking at the index itself (in this case the GSCI Light Energy Index), it appears to be trading in a triangle pattern – which represents a degree of indecision in the market, and sets out clear parameters for a breakout.


How Can Investors Gain Pure Dividend Exposure?
Michael McDonald –
For years, investors in bonds have been stripping all the coupons off Treasury bonds and selling the resulting two bonds as distinct investments. Now investors in equity markets are starting to pursue similar tactics.
Investors in stocks today can use a variety of different derivatives tools to separate out dividends from the underlying stock and thus gain pure exposure to dividend cash flows. The market of the product, while still small (less than $1 billion in annual transactions to retail investors), is potentially enormous given the $20-trillion-plus size of the overall equity markets.


All Women Want Options – Live Seminar – 3 CU Credits Tickets, Tue, Sep 19, 2017 at 8:00 AM
DyMynd’s 180-minute All Women Want Options workshop, accepted by the Investment Management Consultants Association (IMCA) for 3 Continuing Education credits, was spawned from DyMynd Founder, Carolyn Leonard’s personal experience with options trading and how it defined her relationship with money. It aims at providing Financial Advisors with the knowledge they need to incorporate options trading strategies into their client’s portfolios as well as enabling them to create long lasting relationships with their female clients.

Register Now for MX’s 10th Annual Options Education Days!
PR Newswire via Benzinga
Montréal Exchange (MX) today announced the fall schedule for their 2017 Options Education Days. Bringing together individual investors with varying levels of experience, these full-day training sessions are designed to equip investors with the knowledge and insights necessary to successfully navigate the options market.


Henry Hub Emerges as Global Natural Gas Benchmark
Alison Sider and Christopher M. Matthews – WSJ
An unassuming confluence of pipelines here in the heart of Cajun Country is becoming the most important place in the world for natural gas prices.

Here’s How the Euro Is Likely to Fare Against World Currencies
Don’t get distracted by Thursday’s ECB-driven slump: the euro has been redrawing the global currency map on its journey to multi-year highs.

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Graduate of University of Minnesota School of Journalism and Mass Communication