Block Trade Analysis – Buyer of 250,000 XLF Jan 20th 25 Calls

All of equity market sectors the financial sector seems to have benefited the most since Donald Trump was elected President back on November 8th.  Note on the price chart below that as of mid-day today the Financial Select Sector SPDR Fund (XLF) is up about 19% since election day.


Apparently one trader expects this bull run for XLF to continue into the new year.  This morning, less than 90 minutes into the trading day, there was a buyer of 250,000 XLF Jan 20th 25 Calls for 0.13.  This occurred when the fund was 23.54.  So far things are looking good for this trade as while I’m writing this XLF is at 23.84 and those 25 Calls are bid at 0.21.


As always, this is an analysis, not a trade recommendation.


Block Trade Analysis – TOL Earnings Trade

As I write this Toll Brothers (TOL) is trading up 0.73 to 31.20.  The company reported earnings this morning.  I scrambled to find a trade that called the direction of this earnings reaction from yesterday and didn’t have to look to hard.  With just under half an hour to the close and TOL trading at 30.47 someone came in and sold several hundred TOL Dec 9th 29.50 Puts for 0.50 and purchased the TOL Dec 9th 27.00 Puts for 0.15 netting a credit of 0.35 per spread.  The payoff as of the close on Friday the 9th appears below.


This trade just needed to get the direction right and it looks good for the moment.  The worst-case scenario would be TOL at 27.00 or lower, which would involve a drop of over 10% from yesterday’s close.  I checked the 3-year history on TOL’s earnings reaction and the worst drop was just under 8%.

Block Trade Analysis – Long Dec VIX Put

Buying a single option is not the most exotic trade, but it can be interesting, especially when it involves buying a VIX option.  This morning, with VIX at 12.75 and the December VIX futures trading at 13.95 there was a buyer of 12,000 VIX Dec 21st 14.00 Puts for 1.10.  A payout at expiration on the morning of the 21st appears below.  Note the VIX futures and spot VIX levels when the trade was executed are highlighted on the diagram.


Both the futures and spot index finished the day at lower levels.  However, the more important prices for our purposes are from when the trade was executed.  Note spot VIX is at a price where this trade turns a profit at expiration.  The futures are at a level that is 1.05 above the break-even level of 12.90.

A long VIX put is a way to express an opinion that market volatility is going to remain low and when the futures are at enough of a premium to spot VIX the payoff may work out as it has for this trader above.

Note this is an analysis of a trade executed today and not a trading recommendation.  

Whistling Over the Bridge

At my last writing I had taken an accounting-sheet loss by simply exchanging one security for a comparable one and then selling some options against that position with the intention of bringing in some extra return on that position.  Refresher:

Converted to: (shown after just a few minutes as the position immediately resumed producing red ink):

Well, what happened to those during the earthquake that was election night and the days leading up to it?  I said I’d report back on my bag of Halloween goodies (or NOT-goodies), and here is the answer:

A Market Under Distribution Has No Mercy

After a robust market rise on good turnover after the election, we find ourselves a month later wondering what is next.  Many thought a Trump victory was indeed the elixir needed to get the economy and markets moving, and that sentiment was pronounced immediately with a bullish market response.  Further, bonds were trashed, an amazing allocation shift that happened swiftly and with bold strokes.

Markets tend to punish complacency when you least expect it.  As the volatility was sucked dry into the holiday the talk was about how the new regime was going to flip the economy over on its side, create enormous wealth and prosperity and we’ll live happily ever after.  Well, that notion is certainly gone now, especially in some of the better performing names for 2016.

Distribution signs have been showing up for awhile now, and if markets are not going up?  They are likely to head lower.  But frankly, some mild selling is not unusual.  Perhaps there is a catalyst for buyers to step up, fixed income is certainly not the best alternative.  When breadth weakens, strong opens are sold off, and the market on close orders are often heavy sells then we can see signs of institutional distribution.

These occur quite frequently, and with high frequency and algorithmic traders chasing down trends to keep them moving, we tend to see exaggerated moves.  However, we must pay attention to the big money flows – through the markets, there has been mild distribution the past few weeks.  When volatility doesn’t move then that wreaks havoc on both bullish and bearish plays.

Overall volatility though does not have to rise sharply to see distribution, nor does a massive selloff have to occur.  We pay close attention to the indicators and move with them.  Most are lining up bullish in the intermediate term but flattening out in the short term.

I suspect much of the selling is a wipe off of the froth created on the run up post election, and safe haven distribution in front of the Fed meeting in two weeks. Though it is pretty obvious the move they intend to make at their next meeting, which is raise the funds rate.

The Weekly Options News Roundup – 12/4/2016

The Weekly News Roundup is your weekly recap of CBOE features, options industry news and VIX Index and volatility-related articles from print, broadcast, online and social media outlets.

Risk Managed Successfully
rmc-asia-2CBOE wrapped up its 2nd annual Risk Management Conference (RMC) Asia in  Hong Kong Thursday.  Over a 160 financial professionals attended the two-day conference, discussing the latest products and strategies for managing risk, enhancing yield and lowering portfolio volatility, placing the CBOE Volatility Index (VIX) on the mainstage.   In the photo, CBOE Vice President of Business Development, Matt Moran, discusses new developments in options and volatility-based benchmarks and indicators.

John Coates, a former derivatives trader and former senior research fellow in neuroscience and finance at the University of Cambridge, was featured as a key note speaker, discussing the dynamically fascinating topic, “Can Neuroscience Now Predict Your Profitability?”

For conference highlights, including blogs recapping speaker presentations and video interviews from previous conferences, visit

VIX FIX: Volatility Just Got Trumped 
After a rapid spike in volatility and stock market death spiral following the historic U.S. Presidential Election, the market is seemingly coming to terms with a Trump Presidency.  The outlook of a potential softening in the regulatory space under the new administration, seen as a win for businesses and investors, triggered a rally in which the Dow Jones Index saw several days of record highs, breaking the 19,000 level for the first-time ever. Meanwhile, the CBOE Volatility Index remained complacent, staying in a narrow range between 12 1/2 and 14 1/2 this week.  Admittedly, no one truly knows how the new administration will govern, and as we approach inauguration day, volatility may present itself as a guest of honor.

“Tail Risk Wagging the Dog with Wall Street Fear Gauge” – Miles Johnson, Financial Times

“VIX Duration: Why it Matters” – Gregory King, Seeking Alpha

“Trading VIX Update: Year-to-Date Trading Return Exceeds 1000%” – Artyom Zakaryan, Seeking Alpha

“Time to Reload on VIX?” — Peter Tchir, Forbes

“Four Reasons the Bulls will Stay in Charge of the Stock Market” – Howard Gold, Market Watch

Earnings Week of 12/5 – 12/9

As always the data below is based on the last three years of earnings results unless the ticker is in italics.  The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings.  Finally, double check the earnings dates as not all were confirmed.


Weekend Review – Russell 2000 Options and Volatility – 11/28 – 12/2

The Russell 2000 (RUT) took a rest for dominating the Russell 1000 (RUI) last week.  Neither index RUT dropped 2.8% while RUI was down about 1.1%.  Since the election the Russell 2000 had gone a bit parabolic, something we don’t often see from broad based indexes.  As of Friday RUT is up 15.7% while RUI is up 7.5% for 2016.



Weekend Review – VIX Options and Futures – 11/28 – 12/2

VIX gained over 14% last week as volatility rose in reaction to a 1% drop in the S&P 500.  It is hard to quantify, but I’m thinking that a part of the rise is VIX can be attributed to the vote going on in Italy this weekend.  Note that the curve shift was not exactly uniform and the futures lagged the move in the index.  Barring a volatility spike in reaction to this weekend or some other unforeseen market moving event, I would not be surprised to see the VIX curve return to a more natural state of contango.



Volatility Panel Discussion at CBOE RMC

The final session at the 2nd Annual CBOE RMC Asia featured a panel discussion hosted by Steven Sears from Barrons.  The participants were:

  • David Dredge from City Financial Investment Company Pte Ltd
  • Richard Johnston from Albourne Partners (Asia) Limited
  • Benoit Meulot from Nine Masts Capital Limited
  • Laurent Poirot from GF Asset Management

Some highlighted quotes from the panel –

“For long volatility strategies you have to have some sort of management plan”

“There is no such thing as a good tail risk trade, there are only good risk management plans”

“When approaching a volatility oriented strategy on behalf of a client we need them to define their objective so we can properly construct a position on their behalf”

“My experience with fund managers who are not familiar with hedging strategies is that they need help from those who understand constructed hedged strategies”

“We are in a market regime change in addition to a political one”

This brought an end to CBOE RMC in Hong Kong and what was interesting to me is that the uncertainty that market participants have going into 2017 is very similar to the attitudes going into 2016.  There was more discussion about being long volatility than I can recall at any RMC over the past five years.

We reconvene in Dana Point, CA on March 8th to continue the discussion around managing risk and market volatility.  Information on that session may be found at


Long Volatility Discussion at CBOE RMC

Govert Heijboer from True Partner Advisor and James Murray from NSW Treasury Corporation split the duties for a discussion titled Implementing Long Volatility Exposures for Hedging and Alpha today in Hong Kong.

Murray led off by discussing risk management and the objectives of long volatility risk management strategies.  He noted that there is no free lunch when getting long volatility exposure and strategies are a trade-off between convexity, timing, basis and time decay.  A final thought is that long volatility strategies are a portfolio management tool and should be thought of in the context of a broader portfolio.

Heijboer followed up and noted that long volatility guys seem to be in the minority at conferences like this and being long volatility is like being the underdog.  He noted that this has been the year of the underdogs, naming the Chicago Cubs as a perennial underdog who did good in 2016.

He listed different ways to be long volatility such as owning a variety of options, listed volatility derivatives, or using over the counter solutions.  He rhetorically asked why on earth you would want to be volatility.  He answered his question that volatility works when everything else fails.  As an example he shows the performance of the Eurekahedge CBOE Long Volatility Index from 2008 when it was up over 45% for the year.

As far as implementation he discussed the high negative carry associated with being long volatility.  Both time decay and term structure decay have a negative impact on being long volatility.  To circumvent this cost he suggests an active trading strategy.   His firm focuses mostly on short dated listed equity index options to long volatility exposure.

Short Volatility Strategies Discussed at CBOE RMC

Tanuj Dutt, CFA from Nikko Asset Management and Selim Piot from Barclays Capital teamed up to deliver a session on Implementing Short Volatility Strategies at the 2nd Annual CBOE RMC in Hong Kong today.

Piot led things off by discussing how short volatility strategies may be implemented.  He noted the diversification benefits of substituting a part of equity risk with short volatility exposure and followed that thought stating that a portfolio of short volatility across regions and different asset classes increase the diversification benefits.  He presented either variance swaps or using options and delta hedging as alternatives to gain short volatility exposure.  With listed options he highlighted the price transparency of exchange traded options, but also noted that daily trading is required to delta hedge and there is potential path dependency when using options get short volatility exposure.

Dutt then followed on and his presentation focused on the diversification benefits of volatility exposure.  He noted that he is not a volatility specialist, but is using volatility as an asset class to diversify his portfolio.  His example of how diversification using traditional asset classes may not work in the future used a scenario where bonds sell off and stocks follow the bond market lower.  In this feasible situation being diversified using only those two asset classes would not offer the hoped for results.  He demonstrated that the correlation between stocks and bonds has moved from inverse to positively correlated periodically in the past.

Discussion of Market Dislocations at RMC Asia

The keynote speaker this morning for the 2nd Annual Risk Management Conference Asia was Rebecca Cheong who is Head of Americas Equity Derivatives Strategy for UBS Securities.  She also grew up in Hong Kong so this was a special treat for her as well as the attendees.

Rebecca’s presentation was titled Cross-Asset Dislocations and Market Signal.  She started out discussing the difference between a true Cross-Asset Dislocation and a Temporary Dislocation.  A Temporary Dislocation is short lived and the gap in the market place is usually closed in a very short period of time.  A longer term dislocation is referred to as a Structural Mispricing and she stated these sort of events may last for a longer period of time.

She turned the discussion to addressing market signals that may be discerned from volatility.  A couple of examples of dislocations were if SPX options are cheap relative to individual stock option pricing or if it is inexpensive to hedge emerging markets as an asset class but is expensive to hedge individual countries.

A final point that Rebecca addressed in her presentation involved the impact of volatility oriented ETPs on the VIX futures markets.  She noted that in cases of large moves in VIX futures there may be a further impact on the pricing as the ETPs are forced to rebalance at the end of the trading day.

2016 CBOE Risk Management Conference Asia

2016 CBOE Risk Management Conference Asia
Options Hub Blog
Edward Tilly Remarks
Thursday, December 1, 2016

CEO Edward Tilly on CBOE Innovation and Bats Acquisition      

Kicking off the start of Day Two of CBOE RMC Asia 2016 in Hong Kong, CBOE Holdings CEO Edward Tilly updated conference attendees on CBOE Holdings’ planned acquisition of Bats Global Markets and on CBOE’s ongoing development of new products, services and tools.

Tilly noted that industry participants’ response to the Bats acquisition has been positive. They “appreciate the anticipated benefits of combining Bats’ U.S. and European equities, ETF trading and global FX platform, with CBOE’s wide array of options and volatility products,” he said.

“We believe the acquisition has the potential to significantly expand and diversify our product line and broaden our reach,” he added. CBOE plans to incorporate the functionality of both technology platforms and migrate it onto the proprietary Bats system.  “It is our aim to make your trading experience more efficient and user-friendly by writing to a single, state-of-the-art technology platform.”

“CBOE is an industry leader in innovation and our focus on bringing new products, services and tools to the marketplace will not change,” Tilly told attendees. As for existing products, investors continue to turn to CBOE’s flagship S&P 500® (SPX) and CBOE Volatility Index® (VIX® Index) products, using CBOE SPX options for exposure to the broad U.S. market, and the CBOE VIX Index as a proxy for global equity market volatility.

Given the global appeal of these products, expanding access to SPX and VIX trading has been a top priority for CBOE, Tilly said.  During extended trading hours, VIX futures trade nearly 24 hours a day, while SPX and VIX options are available for a 6 hour and 15 minute extended session, beginning at  2:00 a.m. Chicago time.  Volume in extended trading hours has been building steadily and tends to peak around major news events such as the U.K.’s Brexit vote in June and the U.S. Presidential election in November.

In other index product news, Tilly noted that CBOE’s partnerships with MSCI and FTSE Russell have added a significant international dimension to CBOE’s index option complex.  CBOE and these strategic partners are working to launch new products, educate customers on their uses and, in the case of MSCI, expand data distribution.

Tilly also noted CBOE offers a broad array of other products, including benchmark indexes designed to track the performance of investment strategies that use options or volatility products to help manage risk and enhance yield.

CBOE now publishes data on more than 30 such strategy benchmark indexes, including the CBOE S&P 500 Smile Index, which was announced in October, and four indexes CBOE developed in collaboration with Eurekahedge, a Singapore-based hedge fund research company.  The CBOE-Eurekahedge benchmarks measure the performance of hedge funds that employ distinct volatility-based investment strategies.  Tilly said that third party white papers analyzing the performance of CBOE’s strategy benchmarks are used by fund managers and advisors to demonstrate to their customers how options can be used effectively in an investment portfolio.

Tilly wound up his remarks by reaching out to CBOE’S Asian clients and investors. He pledged CBOE’s ongoing dedication to investor education, much of which was been executed by the CBOE Options Institute, which has seen growing participation from Asian market participants. Last year, CBOE partnered with the Singapore Exchange to launch the Options Institute at SGX, the first international extension of CBOE’s educational facility.

In addition, CBOE Futures Exchange (CFE) received Registered Market Operator approval in Singapore in August. That followed approval in Taiwan to have the VIX futures contract designated as an eligible futures contract for Taiwanese traders.  Korea also was given foreign jurisdiction for CFE trading earlier this year.

Currently there are 18 CFE-approved foreign jurisdictions, and Tilly said the exchange is seeking approvals in additional countries. Through a foreign trader incentive program, CFE rebates certain fees for traders at proprietary trading firms that have not previously traded on CFE — and who are located in approved foreign jurisdictions.  CFE is planning to extend its foreign trader incentive program, with some potential modifications, into 2017.

Tilly concluded by encouraging attendees to share their thoughts and questions with the CBOE team.  Many of the new product and service innovations created by CBOE in the past were first discussed at RMC.

# # #

Cautionary Statements Regarding Forward-Looking Information
This communication contains certain statements regarding intentions, beliefs and expectations or predictions for the future of CBOE Holdings, Inc. (“CBOE”) and Bats Global Markets, Inc. (“Bats”), which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks,” “projects” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “would,” “could,” “may” or variations of such words and similar expressions are intended to identify such forward-looking statements, which are not statements of historical fact or guarantees or assurances of future performance. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. 

 Actual results could differ materially from those projected or forecast in the forward-looking statements.  The factors that could cause actual results to differ materially include, without limitation, the following risks, uncertainties or assumptions:  the satisfaction of the conditions precedent to the consummation of the proposed transaction, including, without limitation, the receipt of stockholder and regulatory approvals (including clearance by antitrust authorities necessary to complete the proposed transaction) on the terms desired or anticipated; unanticipated difficulties or expenditures relating to the proposed transaction, including, without limitation, difficulties that result in the failure to realize expected synergies, efficiencies and cost savings from the proposed transaction within the expected time period (if at all), whether in connection with integration, combining trading platforms, broadening distribution of offerings or otherwise; CBOE’s ability to maintain an investment grade credit rating and obtain financing on the anticipated terms and schedule; risks relating to the value of CBOE’s shares to be issued in the transaction; disruptions of CBOE’s and Bats’ current plans, operations and relationships with market participants caused by the announcement and pendency of the proposed transaction; potential difficulties in CBOE’s and Bats’ ability to retain employees as a result of the announcement and pendency of the proposed transaction; legal proceedings that may be instituted against CBOE and Bats following announcement of the proposed transaction; and other factors described in CBOE’s annual report on Form 10-K for the fiscal year ended December 31, 2015, which was filed with the Securities and Exchange Commission (the “SEC”) on February 19, 2016, CBOE’s quarterly report for the quarterly period ended September 30, 2016, which was filed with the SEC on November 8, 2016, CBOE’s quarterly report for the quarterly period ended June 30, 2016, which was filed with the SEC on August 2, 2016, Bats’ final prospectus, which was filed with the SEC pursuant to Rule 424(b) on April 15, 2016, Bats’ quarterly report for the quarterly period ended June 30, 2016, which was filed with the SEC on August 5, 2016, Bats’ quarterly report for the quarterly period ended September 30, 2016, which was filed with the SEC on November 8, 2016, and other filings made by CBOE and Bats from time to time with the SEC.  The factors described in such SEC filings include, without limitation:  the loss of CBOE’s rights to exclusively list and trade certain index options and futures products; economic, political and market conditions; compliance with legal and regulatory obligations (and changes thereto), including obligations under agreements with regulatory agencies and potential conflicts between self-regulatory responsibilities and for-profit status; increasing competition in the industries in which CBOE and Bats operate; CBOE’s and Bats’ ability to operate their respective businesses without violating the intellectual property rights of others and the costs associated with protecting their respective intellectual property rights; decreases in trading volumes or a shift in the mix of products traded on CBOE’s or Bats’ exchanges; each of CBOE’s and Bats’ ability to accommodate trading volume and transaction traffic, including significant increases, without failure or degradation of performance of their respective systems; CBOE’s and Bats’ ability to protect their respective systems and communication networks from security risks and breaches; the ability to manage CBOE’s and Bats’ growth and strategic acquisitions or alliances effectively, including the ability to realize the anticipated benefits of past acquisitions; the ability to adapt successfully to technological changes to meet customers’ needs and developments in the marketplace; and the impact of legal and regulatory changes and proceedings, whether or not related to the proposed transaction. 

 Neither CBOE nor Bats undertakes, and each of them expressly disclaims, any duty to update any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

 Additional Information Regarding the Transaction and Where to Find It
This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval.  This communication is being made in respect of the proposed merger transaction involving CBOE, Bats, CBOE Corporation and CBOE V, LLC. The issuance of shares of CBOE common stock in connection with the proposed merger will be submitted to the stockholders of CBOE for their consideration, and the proposed merger will be submitted to the stockholders of Bats for their consideration. In connection therewith, CBOE filed with the SEC on November 18, 2016 a Registration Statement on Form S-4 that included a preliminary joint proxy statement/prospectus, and each of the companies may be filing with the SEC other documents regarding the proposed transaction. CBOE and Bats will mail the definitive joint proxy statement/prospectus to CBOE stockholders and Bats stockholders, when it is available. BEFORE MAKING ANY VOTING OR ANY INVESTMENT DECISION, INVESTORS AND SECURITY HOLDERS OF CBOE AND/OR BATS ARE URGED TO READ THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS REGARDING THE PROPOSED TRANSACTION AND ANY OTHER RELEVANT DOCUMENTS FILED OR TO BE FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. Investors and security holders may obtain free copies of the definitive joint proxy statement/prospectus, any amendments or supplements thereto and other documents containing important information about each of CBOE and Bats, as such documents are filed with the SEC, through the website maintained by the SEC at Copies of the documents filed with the SEC by CBOE will be available free of charge on CBOE’s website at under the heading “SEC Filings” or by contacting CBOE’s Investor Relations Department at (312) 786-7136. Copies of the documents filed with the SEC by Bats will be available free of charge on Bats’ website at under the heading “SEC Filings” or by contacting Bats’ Investor Relations Department at (913) 815-7132.

 Participants in the Solicitation
CBOE, Bats, their respective directors and executive officers, certain other members of CBOE’s and Bats’ respective management and certain of CBOE’s and Bats’ respective employees may be deemed to be participants in the solicitation of proxies in connection with the proposed transaction. Information about the directors and executive officers of CBOE is set forth in its proxy statement for its 2016 annual meeting of stockholders, which was filed with the SEC on April 6, 2016, and its annual report on Form 10-K for the fiscal year ended December 31, 2015, which was filed with the SEC on February 19, 2016, and information about the directors and executive officers of Bats is set forth in its final prospectus, which was filed with the SEC on April 15, 2016.  Each of these documents can be obtained free of charge from the sources indicated above. Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the definitive joint proxy statement/prospectus and other relevant materials to be filed with the SEC when they become available.