| April 28, 2022 | | | | | Jeff Bergstrom
Editor
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| | | | Observations & Insight | | |
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| | | | | | Lead Stories | | | Do Options Belong in the Portfolios of Individual Investors?
Victor Haghani and James White - Elm Wealth
Judging by retail investor stock option trading volumes, the answer would seem to be an emphatic and resounding "YES!" For the first time since the introduction of listed equity options in 1973, the average daily notional trading volume of options on individual stocks has matched that of the underlying stocks themselves - at about $450 billion per day - with retail investors reckoned to account for about a quarter of this activity. On top of this is another $1 trillion per day in trading in options on stock indexes, plus further volume in non-exchange traded activity in structured products and exotic options.2
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JPMorgan Quants Say Stock Market Is Worried About Wrong Risks; Strategists say inflation, rate hike fears may be misplaced; Slowing earnings, economic growth signal volatility ahead
Nikos Chrysoloras - Bloomberg
While investors have been fixating on inflation and rate hike fears, the true signs of trouble lie in earnings growth outlooks, according to JPMorgan Chase & Co. quantitative strategists. "Global profit forecasts have been slowing for a number of months" and global earnings data are now "in net downgrade territory," quant and derivatives strategists led by Khuram Chaudhry wrote in a note to clients. "Our reading of the earnings cycle, and its drivers, suggests that the slowdown is indicating that inflation may have peaked and bond yields may have exhausted themselves."
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Viewpoint - Getting margin right
Walt Lukken - FIA
When derivatives markets become more volatile, everyone agrees that margin requirements must go up. But how much higher? Set margins too high, and trading becomes too expensive. Set margins too low, and traders take too much risk. It's the Goldilocks problem - margin needs to be just right.
Initial margin functions as the first line of defense against a default. It protects the derivatives markets from losses when a trader takes too much risk and cannot cover his or her losses. Getting it right is therefore critical to ensuring that traders have the right incentives to manage their risks and that the rest of the market is protected when they get it wrong.
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Volatility Roars Back to Argentina FX Market on Commodities Drop
Ignacio Olivera Doll and Scott Squires - Bloomberg
Volatility has come roaring back to Argentina's currency market as the gap between Argentina's official and parallel exchange rates surges to its widest in more than two months -- just days after narrowing to the smallest in a year.
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The Fed's racing to raise rates, but how high remains an open bid
Ann Saphir and Howard Schneider - Reuters
U.S. Federal Reserve officials have aligned around plans to accelerate the pace of interest rate hikes this year but remain split over what could be the make-or-break decision of where to stop to avoid dragging the economy into recession.
That debate is only beginning but will become more critical this summer as policymakers gauge how quickly their initial rate increases cause households and firms to slow spending and whether that, in turn, slows the pace of inflation running at levels not seen since the 1980s.
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Megabanks have lost a quarter-trillion dollars in market value in 2022 stock swoon
Steve Gelsi - MarketWatch
Despite their fortress balance sheets and stress tests, U.S.'s banks have been weakened this year as inflation and the prospects of a recession weigh on the mightiest on Wall Street.
Investors have flashed a big red light at the six largest publicly traded U.S. banks, which have underperformed the broad market and erased a whopping $257 billion out of their combined $1.44 trillion market cap at the start of the year.
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Hedge funds attract the biggest inflows in 7 years on the back of market volatility
Yun Li - CNBC
The hedge fund industry attracted its largest inflows in seven years during the first quarter as investors sought downside protection amidst a volatility spike triggered by fears of inflation and rising rates as well as geopolitical tensions.
The $4-trilion community saw total capital inflows of $19.8 billion during the first three months of 2022, the highest quarterly inflow since the second quarter of 2015, according to hedge fund data firm HFR.
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| | | | | | Exchanges | | | CME Steps Up Battle Against LME With New Aluminum Contracts; New aluminum contracts will launch on May 23, CME Group says; CME is looking to build on expansion in copper trading
Mark Burton - Bloomberg
The Chicago Mercantile Exchange will launch new aluminum options contracts next month, as it steps up a campaign to wrestle trading away from its London rival in the wake of a nickel-trading debacle.
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Revision of the Official Settlement Price Methodology for Hang Seng Index Futures Options and Hang Seng China Enterprises Index Futures Options
HKEX
Hong Kong Futures Exchange Limited ("The Exchange") will enhance the methodology used to calculate the Official Settlement Price ("OSP") of Hang Seng Index ("HSI") Futures Options and Hang Seng China Enterprises Index ("HSCEI") Futures Options, subject to regulatory approval, tentative effective on Friday, 17 June 2022. For the avoidance of doubt, the current OSP methodology will be utilised for the HSI Futures Options and HSCEI Futures Options expiration on 20 May 2022. The revised OSP methodology will incorporate price references between 3:55 p.m. and 4:00 p.m. on the contracts' Expiry Day.
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| | | | | | Regulation & Enforcement | | | The IMF Has Finally Dumped a Damaging Orthodoxy
Natalie Leonard - Bloomberg
The International Monetary Fund long had an unyielding view of how global finance should work: Capital must flow freely across borders, no matter the consequences. It just took an important step away from that orthodoxy â and not a moment too soon for some developing nations.
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| | | | | | Strategy | | | The Stock Market Is Getting Scary. There's an Options Strategy for That.
Steven M. Sears - Barron's
Volatile stock prices are thrusting the humble covered-call strategy to the forefront of the options market.
The strategy entails selling a call option with a strike price higher than the underlying stock priceâand that generally expires in under three months. It's well suited for investors who are looking for ways to manage long-term stock positions that are suddenly facing upside resistance. (Call options give a buyer the right to purchase an underlying asset at a set price and time.)
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Opinion: Bear markets can unleash some of their scariest action while the stock market is oversold --- like it is now
Lawrence G. McMillan - MarketWatch
The S&P 500 index has fallen nearly 500 points this month - much of it in the last week. It had tried to rally, but bumped into the 200-day moving average, which proved to be stiff resistance. Selling has accelerated from there, and now the lows of February and March (4100-4200) are being tested again.
That entire scenario keeps the S&P chart negative, in that it is still in a downtrend (blue trend lines on the accompanying chart).
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Volatile Market Conditions Create Unique Challenges To Managing Price Risk
Steve Hendrickson - JDSupra
I had the pleasure of moderating one of the panels at the World Oilman's Minerals and Royalty Conference (MARC) held in Houston. The title of our session was "Managing Risk", which of course is an extremely broad topic. We focused our discussion specifically on commodity price risk, and we got some great insights from two industry veterans in energy trading: Greg Broussard, Managing Director and Global Head of Financial Trading for Cargill; and John Saucer, Head of Crude Oil Markets for Mobius Risk Group.
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How to use covered calls as portfolio protection in volatile markets
Tyler Bailey - CNBC
The S&P 500 is on pace for its worst month since March 2020, and the average stock in the index is down about 20% from its 52-week high. Couple that with a volatility index above 30 and on pace for its best month since November, and you have a very perilous environment for your portfolio.
Luckily, there are ways to use options to protect your holdings against downside, and one of the simplest strategies is also one of the most effective.
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| | | | | | Miscellaneous | | | Fidelity Hiring Spree Continues With Plans to Add Another 12,000 Employees; Firm is building out client-facing teams to handle account growth from a boom in individual investing
Justin Baer - WSJ
Fidelity Investments said it plans to hire another 12,000 people by September, doubling down on a bet that the individual-investing frenzy that began during the pandemic will outlast the market's recent volatility. The Boston financial firm expects to end the year with as many as 68,000 employees, up about 19% from the start of 2022, building on a hiring spree that began in late 2020. Fidelity hired 7,200 associates that year and another 16,600 in 2021. The bulk of the new hires will be in client-facing and technology roles.
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What Was Bill Hwang's Plan? Matt Levine Explores Archegos $20B Failure
Matt Levine - Bloomberg
Here is a simplified version of the Archegos story. Archegos Capital Management was a family office run by Bill Hwang, a former Tiger Cub hedge fund manager, that invested his personal fortune. Starting in about 2020, Archegos's investment strategy consisted of buying a whole ton of shares of like 10 stocks, using mostly money borrowed from about a dozen banks. (Technically it did this buying using total return swaps rather than actually buying the stocks on margin, but that is a minor point.)
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Trader who lost $20bn was doing fine until he worked from home
Daniel Davies - eFinancialCareers
One of the biggest fears of bank and hedge fund executives at the start of the COVID pandemic was that if staff were allowed to work from home, there might be a lot of "rogue trader" losses. The theory was that a combination of lack of effective compliance oversight and cabin fever could lead to people losing their sense of proportion and taking silly risks.
This didn't happen ... or at least, not on the sell side. And not in hedge funds either, where there are also risk limits and bosses and where people were aware of the risks and took precautions against them. But if the indictment of Archegos' Bill Hwang is to be believed, something of exactly this kind happened. And because it was a family office, where the boss was the chief trader and also the investor, there was nobody to stop it.
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