Breaking News

Greed, for Lack of a Better Word, Is Taking a Big Hit Today; Federal Reserve’s Moves May Ignite Volatility

Lead Stories

Greed, for Lack of a Better Word, Is Taking a Big Hit Today
Cormac Mullen – Bloomberg
One of the best performing trades this year reversed course Thursday as stocks fell and volatility bounced back.
The VelocityShares Daily Inverse VIX Short-Term exchange-traded note, ticker XIV, which lets investors bet on continued low volatility, fell as much as 4.5 percent Thursday, after closing at a record high the day before.

Federal Reserve’s Moves May Ignite Volatility Wall Street Craves Goldman Sachs (GS) Predicts
Bradley Keoun – TheStreet
U.S. President Donald Trump’s tweets haven’t done it. North Korean leader Kim Jong-Un’s nuclear threats haven’t either. Nor have allegations that Russia attempted to interfere with U.S. elections.
Virtually nothing has been able to jolt global markets out of this year’s stupor, characterized by unusually low daily price swings, or volatility, in stocks, bonds and commodities.

****JB: Careful what you wish for. You just might get it.

Black Monday Anniversary: The Most Dangerous Trade Right Now
Elizabeth Harrow – Schaeffer’s Investment Research
Today marks the 30th anniversary of the infamous 1987 “Black Monday” stock market crash, and — despite a geopolitical environment that’s fairly riddled with risk and uncertainty — the major equity indexes have soared to multiple consecutive record highs. Meanwhile, over the last six months, the average daily CBOE Volatility Index (VIX) reading has been a mere 10.82 — well below the VIX’s five-year mean of 14.66. So, given that we’re smack in the middle of the worst month for market crashes, is this price action pointing to another imminent bout of mayhem for U.S. stocks?

Stocks Slide From Records as Volatility Bubbles Up: Markets Wrap
Sarah Ponczek – Bloomberg
Stocks dropped around the world with disappointing corporate earnings and a report that Apple Inc. was dialing back its orders reversing the sentiment that sent benchmark gauges to record highs the day before.

Is the most hated bull market in stocks becoming dangerously over-loved?
Simon Maierhofer – MarketWatch
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” — Sir John Templeton
That simple truth (partially) explains why U.S. stocks have continued relentlessly higher.

Industry Executives Think a Bitcoin ETF Is on Its Way
Matthew Leising and Brian Louis – Bloomberg
Bitcoin exchange-traded funds are coming, helped by the emergence of derivatives on the digital currency, according to industry executives.
Don Wilson, founder of Chicago-based trading powerhouse DRW Holdings LLC, said on a panel at the Futures Industry Association annual conference in Chicago that it seemed obvious that futures and options will lead to an ETF. His view was echoed by others who spoke at the event Thursday.

Waiting for the “Trump Slump” in the Stock Market
The New Yorker
As Donald Trump has been busy telling everyone, these are happy days in the stock market. On Wednesday—the day before the thirtieth anniversary of “Black Monday,” October 19, 1987, when prices on Wall Street crashed—the Dow Jones Industrials Average closed at yet another record: 23,157.60. For the year to date, the Dow is up about seventeen per cent. Since last November’s election, it has risen by about a quarter.

Ray Dalio’s Shorting The Entire EU
Seeking Alpha
A point BOE Governor Mark Carney made recently may be the biggest cog in the European Union’s wheel (or is it second biggest? Read on). That is, derivatives clearing. It’s one of the few areas where Brussels stands to lose much more than London, but it’s a big one. And Carney puts a giant question mark behind the EU’s preparedness.

A Derivatives Look At What Happened To ‘Reflation’
Jeffrey P. Snider – Seeking Alpha
The Office of the Comptroller of the Currency (NASDAQ:OCC) reports that total gross notional derivatives contracts owned and outstanding by domestic banks rose for the second straight quarter. The OCC statistics are one quarter behind, meaning that though banks themselves are reporting Q3 numbers with earnings all figures shown here are from the official compilation for Q2. As such, the general trend was closer in line with “reflation” than in the most recent quarter, but clearly, in transition from a more thorough embrace in Q1.

One of the Biggest ICOs Yet Crashes Before It Even Launched
Yuji Nakamura and Lulu Yilun Chen – Bloomberg
Tezos, the startup which raised $232 million in a July initial coin offering, plunged on derivative exchanges after revealing a management spat and little progress in developing its product.

Fixed Income Market Briefing
Eurex Exchange
Looking back on the third quarter of this year, I’d say that global markets have held up well. Although we have seen implied volatility remain range bound, volumes across the board increased year-on-year (YOY). Periphery futures and options contracts have benefited from regional geopolitical and event risks, together with short-term spikes in volatility. The September sell-off saw strong volumes across the core benchmark products including futures and options. Bund volatility continues to trade in the 4%-6% corridor and open interest (OI) is +20% YOY.

Exchanges and Clearing

CME Group and JPX Enter into Agreement to Launch Japanese Yen-Denominated TOPIX Futures Contract on CME
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, and Japan Exchange Group (JPX), Asia’s leading comprehensive exchange group, today announced the launch of Japanese Yen-denominated Tokyo Stock Price Index (TOPIX) futures contracts to begin trading on CME Globex by Q1 2018, pending all relevant regulatory review periods.

CME Group adds coking coal options as exchanges seek benchmark hedging – Metals
Platts News Article & Story
Futures exchange CME Group plans to launch next week coking coal options contracts, expanding a range of met coal derivatives available to traders and speculators as spot market references in physical trading expanded this year.

India ‘Formalizes’ Gold Trade With First Ever Gold Options Contract
Anna Golubova – Kitco News
India took another step towards formalizing its gold trade by launching the country’s first ever gold options contract on the Multi Commodity Exchange (MCX).
The country’s Finance Minister Arun Jaitley spoke at the launch, highlighting the significance of this step.

Regulation & Enforcement

Brexit Spurs Move to Use Irish, French Law in Derivatives Deals
John Glover – Bloomberg
The option of being governed by Irish or French law may be added to derivatives documentation under a plan intended to smooth trading once Britain has left the European Union.

CFTC and European Commission Make Progress on Cross-Border Agreements
On October 13, 2017, the Commodity Futures Trading Commission (CFTC) announced two cross-border developments with the European Commission (EC) that take significant steps toward reconciling regulation of cross-border derivatives and cross-border entities generally. First, the CFTC approved a determination finding the CFTC and European Union (EU) margin requirements for uncleared swaps to be comparable.1 The EC also adopted an equivalence decision regarding the CFTC margin requirements.2 Second, CFTC Chairman J. Christopher Giancarlo and Valdis Dombrovskis, the EC’s Vice President for Financial Stability, Financial Services and Capital Markets Union, announced “A Common Approach on Certain Derivatives Trading Venues” (the Giancarlo-Dombrovskis Common Approach).3


I Love The Smell Of ‘Chaos’ At 3:30 In The Morning
Seeking Alpha
If you were up at 3:30-ish New York time (something I don’t generally recommend), you saw a preview of how things can suddenly go “wrong.”
We’re barely two hours into the regular session on Wall Street as I write this, so I have no idea how we’ll ultimately close, but what I do know is that a lot of folks were scrambling around on Thursday to “explain” what exactly happened to the Hang Seng and to risk appetite more generally overnight.


How To Trade The VIX Flowchart
That’s actually a trick headline, as you can’t trade the VIX directly. It’s just an index of options prices. But you can invest/trade in products that track the VIX, like VIX futures, VIX ETFs, inverse ETFs, and more (here’s an in-depth research report). It’s called trading volatility, and with seemingly everyone giving it a shot of late (Billions are in VIX futures-related ETFs), we thought a nifty flowchart of just how to proceed would be worthwhile.

****JB: Humor so it is in “Miscellaneous”. Might be a fun one to print and put on the wall next to your desk though.

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About Author

Bergstrom is chief information officer of John J. Lothian & Co. He edits MarketsWiki and JLN Options.