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Making a Friend of Fear; Speculators take record bet Fed will pull rate trigger soon


Lead Stories

Making a Friend of Fear
Steven M. Sears – Barron’s
We find ourselves in the midst of great debates in the stock and options market. The Standard & Poor’s 500 index, for which 2017 was the least volatile year since 1965, is no longer serene. Early February brought about the most severe single-day decline for the Dow Jones Industrial Average, and the largest one-day increase for the Cboe Volatility Index. VIX was so low for so long that it seemed as if it would never return to its long-term average of about 19. Now, VIX seems unlikely to return to nine or 10, where it was in early January.

****JB: Sadly, this is the last column from Steven M. Sears for Barron’s. He has been a favorite of ours at JLN Options as well as a favorite with our readers. We wish him all the best in his future endeavors and hope to see more of him.

Speculators take record bet Fed will pull rate trigger soon
Jamie McGeever – Reuters
Hedge funds and other speculators are making their biggest ever short-term bet on higher U.S. interest rates, a clear sign that the “vol-mageddon” bout of market turbulence earlier this month has almost completely fizzled out. Speculators are also slowly beginning to rebuild their bets on lower U.S. stock market volatility, according to the latest positioning data from the Chicago futures exchanges, potentially offering another source of support to risky assets globally.

Ray Dalio Investment: It’s Dalio Versus Everyone Else As Money Flows To Europe Stocks
Brandon Kochkodin – Bloomberg
Billionaire Ray Dalio has $18.45 billion in bets against Europe’s biggest stocks. Most of the rest of the investing world is headed in the other direction.
U.S. stocks lost $9.7 billion in investment so far this month while Eurozone shares have gained $3.2 billion, according to data compiled by Bloomberg. Peers of Dalio’s firm, Bridgewater Associates, are mostly wagering that Eurozone equities will rise.

A Rational Perspective on The Fed and Interest Rates
Bob Lang – Cboe
The equity markets continue to respond to higher rates on the long end of the curve, but thankfully the Fed sees the entire curve is shifting upward. This would be considered a positive, as opposed to an inverted curve. So, with rates at levels not seen in a couple of years, but for a good reason (a bit of inflation finally coming into the system) why is everyone freaking out? The obsession with higher rates is just mind-boggling, but perhaps we can answer some questions about it here.

VIX Surge Is a Wake-Up Call for Investors
Jeffrey Frankel – Barron’s
The recent stock-market correction—the first in the U.S. in two years—has invited substantial commentary about what investors should do, the role machines have played, and the implications for the real economy. But only some of what has been said is useful.
Many investment advisors have emphasized the need to think long-term, rather than panicking when prices fall. They’re right: The decline in early February isn’t a good reason to sell. What is a good reason to sell is that stock prices are too high from a longer-term perspective.

The VIX Is Back: New Fear And Greed Opportunities Await
Victor Dergunov – Seeking Alpha
The VIX exploded back on the scene with a vengeance in recent weeks. After going through its most depressed period in several decades, the VIX quintupled in a matter of days during the S&P 500’s vicious 12% correction. Several lucrative trading opportunities arose in the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) and other VIX derivatives amidst the incredible fear and panic that accompanied the unprecedented surge in the VIX. Moreover, compelling opportunities based on the VIX’s fear and greed dynamic remain going forward.

Stocks Finally Rose Without VIX Sellers’ Help
Peter Tchir – Forbes
For the first time in months, I can say that I see a healthy respect for volatility in the market and that stocks finally rose without big inflows into the short VIX funds.

VIX: India fear gauge eases, but market players have more than one concern
Sanam Mirchandani – Economic Times
Mumbai: Traders’ expectations of near-term risks have ebbed of late after hitting a two-year high earlier this month, but money managers said this may be a lull before the storm. Political uncertainty ahead of the slew of state elections, risk of MSCI cutting India weightage, foreign fund selling and hardening of bond yields will keep investors on the edge in the coming months, making the recent fall in volatility temporary.

Exchanges and Clearing

Goldman-Backed Circle Agrees to Buy Crypto Exchange Poloniex
Julie Verhage – Bloomberg
Circle Internet Financial Ltd., a closely held cryptocurrency-focused financial-services firm backed by Goldman Sachs Group Inc., said it acquired Poloniex Inc., a digital-token exchange.

Markets: RBI Moves To Deepen Exchange Traded Currency Derivatives Market
The Reserve Bank of India has allowed domestic and foreign investors to take larger positions in the exchange traded currency derivatives segment. The central bank had, at the time of the monetary policy announcement on February 8, said that it intends to raise position limits and a notification has been issued to this effect on Monday.

Singapore approves operation of 3rd derivatives exchange – Xinhua
Xinhua News
The Monetary Authority of Singapore (MAS) has approved the Asia Pacific Exchange (APEX) to operate the city-state’s third derivatives exchange as well as a clearing house, according to a press release from APEX on Monday.
The press release said APEX will launch trading in the second quarter of 2018 and has commenced the process to admit trading and clearing members.

Regulation & Enforcement

Fears of high derivatives to cash turnover misplaced in Indian market
Ashley Coutinho – Business Standard News
The Securities and Exchange Board of India (Sebi) last year expressed concern over the high equity derivatives turnover vis-à-vis cash segment in the Indian market. However, a recent report by Asifma, an independent, regional trade association with over 100 member firms, observes that these fears may be misplaced. “Inconsistent reporting methodology by the NSE/BSE versus other exchanges in the region inflates derivatives trading volumes and paints a misleading picture that Indian markets are excessively dominated by derivatives trading,” said Asifma.


Chartis Research Recognizes Hanweck as a RiskTech Quadrant “Best-of-Breed” Provider Hanweck
Chartis Research has named Hanweck as a RiskTech Quadrant “Best-of-breed” solution for Hedge Fund Risk Management Technology. Chartis is an independent research and advisory firm that provides technology and business advice to the global financial risk management industry.


The Warren Buffett Short Put Trade
Russell Rhoads – Cboe
A few years ago, I was asked to co-author the study guide that accompanies the 3rd version of The Warren Buffett Way. While doing research for this project I came across a discussion of a handful of index put options that Berkshire Hathaway had sold between 2004 and 2008. Every year when the Berkshire Hathaway annual report comes out, I dig in to see how these trades are doing. Here’s the update as of the end of 2017.

Getting The Market Right: Eric Fry On How To Read The VIX Volatility Index
Steve McDonald – Seeking Alpha
This episode was recorded right after the correction earlier this month, when the Volatility Index (VIX) was at multi-year highs. Volatility has come down somewhat since then (although it’s still above its 2017 lows). So, the references in this video to “last week’s” volatility spike are outdated by a few days.
Nonetheless, Eric’s insights about volatility and the market cycle will never be out of date. We hope you enjoy this informative interview.

These ETFs Are Adding Buffers Against Volatility
Rachel Evans – Bloomberg
Two exchange-traded funds that survived a rival-destroying bout of volatility are adding a buffer to their strategies to protect investors — and themselves.
The funds, which trade under the tickers VMIN and VMAX, are changing their methodologies to make them less sensitive to swings in daily volatility, according to a press release from REX Shares LLC, the company behind the products. Going forward, both will focus on futures that expire in two-to-six months, rather than contracts on the Cboe Volatility Index that expire in less than one month, the statement said.

Come On Volatility
George Acs – Seeking Alpha
I’ve always been fascinated by the concept of “volatility.”
When I say “always,” I don’t really mean “always,” but for at least the past decade or maybe a bit more.
Volatility is one of these things that is really hard to comprehend, even though it really shouldn’t be, even as it is applied to stocks and stock markets.
Volatility is nothing more than what is defined by an equation.
Even if that equation may be a complicated one, there is something that should be comforting about the certainty of it and its calculation. There is no art to it.
It is all about science.
Subjectivity versus objectivity.
Emotion versus cold, hard facts.

Look For More Volatility: Stocks Set To Extend Bounce And Then Fail
Steve Miller – Benzinga
The stock market chopped around for most of last week, with the S&P 500 (SPX) closing 15 points higher at 2747.
While the VIX eventually dipped below 17, it flirted with 20 for most of the week. They often spent most of the day rising, only to lose their strength towards the close. On Friday, they saw a very strong move higher towards the end of the day.

Volatility Can Be A Wind In Your Sails
Neuberger Berman – Seeking Alpha
When the CBOE Volatility Index (VIX) briefly hit 50 for a few minutes earlier this month, it generated headlines around the world. There were few such headlines the last time the VIX spent an extended time above 50. The press had enough on its hands covering the collapse of the world financial system and the fact that 50% was being wiped off the value of stock markets.
In other words, the recent VIX spike was a great example of a financial market losing touch with underlying fundamentals due to a technical event.


Cboe Global Markets to Present at Citi Conference on Thursday, March 1
CHICAGO, Feb. 26, 2018 /PRNewswire/ — Cboe Global Markets, Inc. (Cboe: CBOE | Nasdaq: CBOE), one of the world’s largest exchange holding companies, announced today that Chris Concannon, President and Chief Operating Officer, will present at the Citi Asset Managers, Broker Dealers and Exchanges Conference in New York City on Thursday, March 1at 8:00 a.m. (Eastern Time).

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