Breaking News

Stock Returns and Politics = Not Normal; VIX The Tail Wagging The Dog?; Euro Pressured as Volatility Rises

Lead Stories

Stock Returns, Like Politics, Are Not Normal; There are two primary reasons for the protracted decline in both implied and realized volatility.
Dean Curnutt – Bloomberg
Perhaps no consensus opinion has proven more incorrect than the notion that a Donald Trump presidency would lead to more market volatility. So range-bound has been the S&P 500 Index in 2017 that fully 60 percent of the days have produced a daily upside or downside return of less than 0.25 percentage point.

****SD: From WSJ – Investors Grapple With Signs of Unrest and from NY Times – The Stock Market Has Been Magical. It Can’t Last.

Is VIX The Tail Wagging The Dog?
Peter Tchir – Forbes
VIX futures hit a record for open interest. SVXY has almost doubled its assets under management since late June.

****SD: “Wag the Dog” was a pretty solid movie.

Euro Pressured as Volatility Rises on Jackson Hole, FOMC Meeting
Vassilis Karamanis – Bloomberg
The euro started the week on a defensive footing amid thin flows as the market’s focus remained fixed on the central bankers’ summit at Jackson Hole, Wyoming later this week, which has kept intact demand for long-volatility trades.

****SD: Related Fed stories – WSJ has Mario Draghi Is Likely Lay Out End to Europe’s Quantitative Easing; Bloomberg has Yellen, Draghi Head to Jackson Hole Amid Inflation Unease and Cohn Solidifies Lead in Race to Replace Yellen, Economists Say; and Reuters has today’s FX updates.

Demand for Disaster Protection Increases as CBOE SKEW Index Tops 142 Each Day This Week
Matt Moran – CBOE Options Hub
The CBOE SKEW Index (SKEW) topped 142 on each of the first four trading days this week. The long-term daily average for the SKEW Index (since January 1990) is 118.8, but the daily average for the SKEW Index in 2017 (through August 17) is a much higher 134.5. CBOE SKEW Index values, which are calculated from weighted strips of out-of-the-money S&P 500 options, often rise to higher levels as investors become more fearful of a “black swan” event — an unexpected event of large magnitude and consequence, and there is higher demand for out-of-the-money put options on the S&P 500 (SPX) Index that may be used to help protect an equity portfolio in case of a severe stock market correction.

Exchanges and Clearing

?ICE: Exchanging Data and Analytics
Intercontinental Exchange is a leading network of regulated exchanges and clearing houses for financial and commodity markets.

****SD: Exchange outlook from an equities analyst perspective.


Goldman Sachs Seeks Stars to Revive Commodities Unit
Dakin Campbell, Jack Farchy and Javier Blas – Bloomberg
Goldman Sachs Group Inc., seeking a rebound in its commodities business after a bout of losing trades dented earnings, has a plan built around hiring fresh stars and luring new clients.

KCG FX market making veteran joins CBOE’s Hotspot
Hayley McDowell – The Trade
A former relationship manager within KCG’s FX market making business has joined CBOE’s Hotspot as director of FX sales.

Regulation & Enforcement

Volcker changes might have little impact with Basel III still around
Rick Baert · Pensions and Investments
Rolling back some elements of the Volcker rule that target fixed-income markets might make headlines, sources said, but liquidity and trading costs won’t improve in the corporate bond market because Basel III requirements aren’t going away.

Unintended Consequences of MiFID: Job Losses, Trade Turmoil?
Sarah Jones – Bloomberg
With the start of Europe’s MiFID II rules less than five months away, banks and asset managers are scrambling to prepare for a regulatory overhaul that risks doing more harm than good to the finance industry.


Golden Volatility Adds to Allure of High-Convex Defensive Hedges
Tanvir Sandhu – Bloomberg
Low rates volatility has cheapening effect on gold optionality; Carry is still expensive given depressed realized volatility
Risk-off option structures on gold that have low premiums and high convexity exposure may be attractive to hedge a full-blown crisis from either geopolitical risks or White House turmoil.

****SD: From MarketWatch – Speculators haven’t been this bullish on gold since October

Brent Oil Steals Show as Hedge Funds Leave U.S. Crude Aside
Jessica Summers – Bloomberg
While enthusiasm in the U.S. oil market dwindles, things are looking a little brighter across the pond.
For a second week, hedge funds refrained from making big bets on West Texas Intermediate prices stuck below $50 a barrel in New York as American output keeps rising. Meanwhile in London, Brent surged to a 12-week high as global physical markets tighten. The gap between the two benchmarks hasn’t been so wide in almost two years.

Superstitious Stock Traders: Beware of an Eclipse Crash
Lily Katz – Bloomberg
Bored traders with too much computer power have found the key to the next stock market crash: the solar eclipse.
Fed up with political dramas that can be tough to trade on, some have turned their attention to an obscure theory that says market reversals tend to begin around the time of a lunar eclipse and end around the time of a solar eclipse.

How to Invest in the House That the VIX Built
Steven M. Sears – Barron’s
Shares of CBOE Holdings were around $93 early last month, the last time they appeared in this column.
Back then, we recommended purchasing the stock (ticker: CBOE) to profit from volatility trading without wading into the complexities of derivatives on the CBOE Volatility Index, or VIX. Our advice to sell CBOE August $90 put options for $2.54 to profit from an expected advance worked well. The put was basically worthless when it expired on Friday.

How to Hedge With a Risk Reversal Options Strategy
Skip Raschke –
A risk reversal is an options trading tactic executed almost exclusively by professional options traders. There are three basic reasons for this: 1) The tactic is primarily used as a hedge for open positions that are either 100% long or short; 2) The retail-minded options trading public is, for a variety of reasons, mostly ignorant of the ways and value of using the tactic; 3) The tactic is capital-intensive, which for many retail traders is an impediment.

Zinc on a bullish tear but just how high can it go?: Andy Home
Andy Home – Reuters
Zinc on Monday morning hit a fresh decade high of $3,180.50 per tonne on the London Metal Exchange (LME).

****SD: Most OI for LME zinc calls: September 17 expiry = 3,000 strike; October 17 = 3,100 strike; November 17 = 3,000 strike (though substantial OI at 3,500, too); and December 17= 3,400.

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Graduate of University of Minnesota School of Journalism and Mass Communication