Category Archives: Hot Topic Commentary

Developments in Volatility & Option Markets – Event Recap

· · Leave a comment

by Steve Dixon, CFA

On January 12, 2016, Mr. Russell Rhoades from The Options Institute shared his insights and observations on the options market with Society members and other event attendees.  The discussion centered around the innovation of Weeklys just a few years ago and the proliferation of more frequent settlement of stock and index options that has resulted.  Weeklys are now available on about 350 stocks and about 70 ETFs.  Still, Mr. Rhoades was puzzled by the relatively slow uptake by institutions to utilize options contracts that settle each week compared to the traditional monthly settled contracts.  Outside of the institutional realm, trading in Weeklys has been the source of growth of the CBOE over the past several years.

Mr. Rhoades spent time explaining the opportunity inherent in selling at-the-money options with a week or less to expiration to capture the time decay of the contract premium.  This time value, which erodes gradually during much of the contract’s life, accelerates toward zero in the final few days to expiration thereby providing the sweet spot for traders looking to capture the natural decay of part of the contract’s value.  This acceleration isn’t as prevalent for contracts trading in-the-money.

The discussion turned to VIX, as all do these days.  Weeklys on VIX were introduced about six months ago and seem to provide the closest replication of VIX that is possible at present.  In a graphical display, Mr. Rhoades showed the overlay of a VIX Weekly contract over the final five trading days to expiration with the index itself.  The two moved very similarly even when VIX experienced sharp changes.  The mean-reverting nature of VIX provides opportunity for traders and hedgers as well.  The complication has been the effective replication of VIX, to which Mr. Rhoades believes short-dated VIX options provide the best solution to date.

Noting that “the market takes the stairs up and the elevator down”, Mr. Rhoades highlighted several indexes that the CBOE has created that pair traditional long-only positions with a variety of options strategies.  Among his favorite are the CBOE S&P 500  PutWrite Index and the CBOE S&P 500 2% OTM BuyWrite Index.  The former generating absolute and risk-adjusted returns superior to the S&P 500 Index over the past 25-plus years.  Displaying his innovative foresight, one society member suggested that the CBOE consider a 30-Delta PutWrite Index, which seemed to preoccupy Mr. Rhoades with excited anticipation for the remainder of the presentation…only at a CFA luncheon could such a sentence be written!

Mr. Rhoades was an effective presenter, drawing on CBOE trading data and personal experience to illustrate what’s new in the world of options.  Keep an eye on Russell 2000 Index options as they have been the fastest growing index option series of late and as volume improves may offer better opportunity for more effectively hedging portfolios.

2015 Midwest Financial Compensation Survey White Paper

· · Leave a comment
2015 Midwest Financial Compensation Whitepaper 1

Click image to download white paper

CFA Society Minnesota is pleased to share with you the comprehensive findings from the 2015 Midwest Financial Compensation Survey. The data from this research provides you, and the rest of the industry, with a unique comparison of salaries, job satisfaction, and other industry trends in the financial and investment sectors across the entire Midwest region.

We’re also pleased to have expanded this year’s survey beyond Minnesota and the Dakotas to provide data for financial and investment professionals located in Illinois, Iowa, Missouri, Nebraska, Ohio, and Wisconsin. These insights deliver not only localized compensation levels and pay structure, but also aggregate-level data for your peers for the entire region. We trust you will find this information highly valuable and insightful.

To those who completed the survey, thank you for your participation and for taking the time to provide our industry with this unique market intelligence.

 

CFA Society Minnesota Results

View the CFA Society Minnesota survey results here

A Letter from Your Society President – December

· · Leave a comment
Joshua M. Howard, CFA

It only took 9 and a half years, but the Fed finally raised rates. As we all know by now, the FOMC raised rates by 25 basis points on December 16th, the first increase since the middle of 2006. Back then I had been in the industry for less than 5 years, had just finished Level II of the CFA exams and was about to buy a new house, which ended up not being the best timing for a real estate purchase. Many of our newer charterholders were still in college then, and most of us work with colleagues who have never experienced an increase in the fed funds rate during their professional careers until now.

With the Fed’s recent action coming at the end of the year, when many of us are already in the mood to reflect on the past, the increase in rates has spawned numerous articles on how the world has changed in the past decade. For example, Instagram and Twitter each have over 300 million active users now, up from 0 at the start of 2006. They, along with other social media services, have not only changed how we connect with our friends, but also how we share information, organize protests and plan events (both good and evil).

In 2015 it is no longer just the manufacturing sector that fears being undercut by cheaper alternatives and automation – Uber, Airbnb, and many other startups are threatening to upend sectors ranging from transportation to lodging to house cleaning, industries that in 2006 seemed very secure. Even financial services is susceptible, as robo-advisors, passive ETFs and fundamental indexing strategies continue to erode pricing power and put more pressure on active managers to actually produce alpha.

Some things haven’t changed as much as expected. The alphabet soup of financial products – CDOs, ABS, CDS, subprime RMBS – that helped cause many bank failures and the loss of billions of dollars during the financial crisis, were left for dead by 2009. In the last few years, however, amid very low interest rates and a thirst for yield, they have come back to life somehow, like a soap opera star from daytime TV. Actually, the last ten years have killed off more soap operas on network television than financial products.

The next year will bring more change. The Fed may raise rates again, possibly multiple times. Political campaigns in the U.S. will continue, culminating in an election in November. New companies will be started, old ones will fail, mergers will occur. The stock market may correct, or it may soar to new highs (and possibly both). It is an exciting time to be working in finance, and a challenging one.

I thank each and every one of you for the work you do each day for your clients, and for adhering to the highest ethical standards despite the turmoil that sometimes surrounds us. I am constantly impressed and inspired by the work being done by charterholders in the region, and I appreciate your commitment to our Society and the industry.

As 2015 comes to a close, I want to wish all Society members and their families a very happy new year.

Joshua M. Howard, CFA
President of the Board of Directors
CFA Society of Minnesota

Trap Queen

· · 1 Comment
Susanna Gibbons, CFA

A couple of days ago, shoppers at the Westfield Mall in Paramus, NJ got treated to an unexpected shower of cash from Fetty Wap. While out with his daughter, the rapper of the year tossed more than $2,000 in cash over a balcony, and shoppers screamed in delight as they scooped up the bills. How ironic that as Fetty Wap is showering us with cash, Janet Yellen and her Posse are preparing to raise short term interest rates, bringing an end to 7 years of extraordinarily easy monetary policy. A sort of Feddy Wrap, if you will.

The market appears to be well prepared at this point for that first rate hike, and it will probably pass with very little fanfare. But over time, as the Fed slowly turns off the spigot, there will surely be an impact. The problem is, even in the best of times, both the magnitude and timing of the impact from changes in monetary policy are very difficult to predict. We have never had such an extended period of zero interest rates, so assessing how changes in policy will play out seems a like a crap shoot. While we have seen significant recovery in asset prices, growth in the real economy has remained fairly anemic. Seven years of zero interest rates and $3.7 trillion of asset purchases have failed to have a significant impact on growth. The money multiplier has not exactly been boomin’, and Yellen is in real danger of becoming the liquidity trap queen.

Not everyone agrees that we’re in a liquidity trap, of course, but it seems pretty clear that the monetary transmission mechanism is not as effective as it has been in the past, or as we would have liked. We’ve been poised for “lift-off” several times now, and both inflation and growth expectations have continued to surprise on the downside. So when Yellen talks about moving slowly with interest rate hikes, I think we had better take her at her word. This will not be a Greenspan / Bernanke cycle, with regular 25 basis point moves. The minutes from the last FOMC meeting began with the committee’s discussion on equilibrium real interest rates, which likely fell to negative levels during the 2008-9 recession, and are even now close to zero. Equilibrium short-term rates should rise, but only gradually. The falling unemployment rate suggests that what feels like anemic growth probably actually exceeded potential GDP.

That is a heck of a message. Real GDP growth at 2.5% is running ahead of the growth in potential GDP. Equilibrium rates are close to zero. Inflation expectations have declined significantly (as measured by TIPs Breakevens), and this in what looks like the later stages of the expansion – just when we should be worrying about higher inflation. Forget the dot plot, I would focus on the gradual. It feels to me like we aren’t going anywhere, and we better settle in for some liquidity trap luv. Rate hike potential of about 50 basis points over the next year might be all we get, not the 125 or so that futures are pricing in.

There are those who will likely never part with their Fetty Wap cash. There are also some who will save it, and others who went straight to Shake Shack. The choices are always the same. Save it, spend it, hoard it. Whether we realize potential growth may be a function of the latter. And how many hoarders are out there? I wonder….

CFA Society boasts three Top Women in Finance

· · Leave a comment

On Thursday, November 19th, Finance & Commerce Magazine hosted its 15th annual “Top Women in Finance” awards dinner to recognize the outstanding efforts of women in Minnesota who are making noteworthy contributions to their professions, their communities and society at large. The CFA Society of Minnesota is proud to have had three of its members receive this honor in 2015. They are:

Erica Bergsland, Vice President and Director of Research and Trading at Advantus Capital Management.

Jessica Murray, Intermediate Portfolio Manager at Thrivent Asset Management, and Treasurer of the CFA Society of Minnesota.

Debra Ann Sit, Senior Vice President of Sit Investment Associates, who received the award posthumously. Debbie passed away in June 2015 after battling cancer. Her husband, Peter Berge, accepted the award on her behalf.

To be considered for this award, each candidate was nominated by co-worker or other associate. All nominations were vetted by a panel of expert judges representing business and academic interests across Minnesota. All three women have been outstanding Investors, committed to their profession and to their respective communities, and strong supporters of the CFA Society of Minnesota for many years.

In their remarks to Finance & Commerce Magazine, both Erica and Jessica voiced continued commitment to achieving both excellence and diversity within the Investment community. The different viewpoints and experiences of the Society’s members have been a source of strength that both hope will continue to grow.

All three women exemplify the CFA’s high standards of professionalism and integrity. Please join the entire CFA Society of Minnesota as we congratulate Erica, Jessica, and Debbie.