Observations & Insight
The Spread – Week of 1/29 – 2/2
We’re baaaack! The flu season stinks but this episode of The Spread doesn’t. The Spread is a brief recap of some of the notable activity in the options world.
Big Volatility Players May Be on the Loose as VIX Tops 17
Joanna Ossinger and Luke Kawa – Bloomberg
Trading patterns associated with two major volatility players popped up again Friday as the Cboe Volatility Index rose above 15 for only the second day this year.
The move came as the quick rally in U.S. stocks that started the year suffered an abrupt reversal. The S&P 500 may still be up more than 3 percent in 2018, but it tumbled almost 4 percent this week alone, as the VIX has hit its highest levels since November 2016.
****SD: Cboe set several volume records on Friday (see press release in the Exchanges section), including 4.3 million VIX options contracts traded. That blew away the previous record by 39 percent. The “VIX Elephant” and “50 Cent” – as the two traders/institutional players/whoever have been dubbed – accounted for some 2.1 million of that figure. Business Insider has Stock decline has made millions for mystery trader volatility bets and Reuters has more on the pachyderm trader in a story below.
Options prices imply Janet Yellen is leaving on a high note
Matthew C Klein – Financial Times (Subscription)
The Federal Reserve has persistently undershot its longer-run inflation goal ever since that objective was announced six years ago. Instead of growing 2 per cent each year on average, the personal consumption expenditure deflator excluding food and energy has only grown about 1.5 per cent since the start of 2012.
Finally, Investors Get Punched by Volatility
Steven Sears – Barron’s (Soft Paywall)
Everyone has a plan, until they get hit in the mouth.
Investors should consider Mike Tyson’s observation about boxing after last week’s stock market drama. The kerfuffle certainly hasn’t delivered a knockout blow, but the volatility rattled many investors, especially as bond yields increased and stock prices declined.
****SD: I had never heard of FOMUD, a relative of FOMO, which stands for “Fear Of Movement, Up or Down.”
‘VIX elephant’ rides volatility wave to erase hedging losses
Saqib Iqbal Ahmed – Reuters
An unnamed trader dubbed the “VIX elephant,” who for months has prepared for a spike in equity market volatility, adjusted a massive options position as stock prices plunged on Friday, thereby erasing months’ worth of hedging losses.
****SD: More depth on the particular activity of this actor covered in the lead story.
Risk of market contagion has reached a 6-year high, Deutsche Bank analyst says
Mark DeCambre – MarketWatch
Tightly wound correlations between assets have prevailed in recent trade on Wall Street, and they are at their highest level since December 2012, according to Deutsche Bank’s chief strategist, Binky Chadha.
Watch for another selling wave in the stock market as investors are forced out of their low volatility bets
Michael Santoli – CNBC
This is the market dip you wanted. Or said you wanted, as the market kept levitating without let-up for months. Or thought you wanted, before the reality of a 4 percent one-week tumble reminded us how unnerving a sudden break in stock prices looks and feels in the moment.
****SD: From the WSJ – The Market Calm Is Suddenly Gone and Correction Watch Is On
Weekend Review of VIX Futures and Options Feb 3 2018
Russell Rhoads – Cboe Blogs
Last week VIX gained over 50% for the first time since August last year. We all know most of this came Friday with the S&P 500 losing just over 2% on the day. The obituaries being written about VIX after a historically tame year last year may have been a bit premature.
Exchanges and Clearing
Cboe Global Markets Sets Several Daily Volume Records on Friday, February 2
VIX options volume reaches new all – time high, topping the previous record by 39 percent; New single – day records set at Cboe Options, C2 Options and Cboe EDGX Options exchanges
****SD: More on Friday’s activity from Cboe’s Matt Moran – Today the VIX Index Rose 28.5% and VIX Options Set a New Daily Volume Record
Trading venues buzzing on strong start to year
Philip Stafford in London – Financial Times
The busiest January on global markets in many years is raising hopes among exchanges and market venues that 2018 will spark a long-awaited rebound in trading revenues.
Volatility on foreign exchange markets has spiked after comments from the US Treasury secretary about the weakness of the US dollar sent the greenback tumbling and volumes rising.
Commodity Bourses Fear Onslaught By Cash-Rich Equity Platforms
Sajeet Manghat – Bloomberg Quint
Commodity exchanges lobbied with the market regulator to delay unified bourses arguing that they will require time to build infrastructure to compete with cash-rich equity platforms. That didn’t work.
Representatives of commodity derivative exchanges were of the opinion that there is a lack of level-playing field when compared with stock exchanges, according to agenda notes of the Securities and Exchange Board of India’s Dec. 28 board meeting. “Hence, [they suggested that] all products under single-exchange entity may be allowed after another two to three years.”
Meet OCC Investor Services—Supporting Investors and the U.S. Options Industry
Ed Modla, Manager of Investor Services at OCC, the world’s largest equity derivatives clearing organization, discusses his team’s primary functions and responsibilities to better serve investors who use the U.S. exchange-listed options markets.
Citadel Securities is still doing some big hiring, on both sides of the Atlantic
It’s a new year, but Citadel Securities’ old hiring spree is continuing unabated. Two years after it began hiring heavily from banks and other funds, the market maker continues stocking up trading and quant talent.
Hiring Plans on Wall Street Surges in January
Michael Mayhew – Integrity Research
Layoffs on Wall Street slipped in January to the lowest level seen since June 2017. However, the real story in the January jobs data was new hiring plans, which surged to the highest monthly level seen in more than eight years. This data could suggest that the Wall Street jobs outlook could finally be on the upswing.
Regulation & Enforcement
SEC drags feet on approving bitcoin ETFs
Owen Walker – Financial Times
The regulator’s warning was unambiguous. “There are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors,” wrote Dalia Blass, a director at the Securities and Exchange Commission, which oversees the US investment industry.
Goldman Sees S&P 500 Risks Going Either Way, Urges Options Hedge
Joanna Ossinger – Bloomberg
Strategist Kostin still sees path to exceeding year-end target; Positioning data concern, P/E unlikely to push above 18x
Goldman Sachs Group Inc. sees such extensive risks in its year-end S&P 500 Index target of 2,850 — both positively and negatively — that it’s advising clients to use options to maintain their upside exposure but limit risk.
The Curious Combo: Higher Stocks And Vol
January 2018 was a unique month. Usually as stocks rise, volatility falls; as stocks fall, volatility rises. We saw strong gains for the broad market (SPY) in January as the large cap benchmark produced a +5.7% total return, but we also saw an uptick in volatility (VXX). Over the course of the month, the VIX Index, colloquially known as the “fear gauge,” rose by 22.6%, moving from 11.0 at the end of 2017 to 13.5 at the end of January.
Federal Reserve Shackles Wells Fargo After Fraud Scandal
Emily Flitter, Binyamin Appelbaum and Stacy Cowley – NY Times
The Federal Reserve on Friday imposed unusually harsh penalties on Wells Fargo, punishing it for years of misconduct and barring it from future growth until the bank fixes its problems.