By William Davis
History tells us that today’s option market can trace its notional roots back to ancient times, when one Thales of Miletus bet the farm on the season’s olive harvest. Story goes that the speculative Greek, having predicted a larger than usual crop yield, acquired the right to use a certain number of olive presses the following season. When spring came and the olive harvest was indeed a juicy one, the soon-to-be wealthy Thales exercised his options by renting the presses out at a much higher price than he had paid. All without a broker, mind you.
In London, puts and “refusals” (calls) first became well-known trading instruments in the 1690s during the reign of William and Mary
Given the outsized profit and protection potential of this spicy slice of the derivatives space, not even an early Greek mathematician should be surprised at the growth of the industry. Over the years, the market has moved well beyond olive oil presses to include options on equities, options on indexes, options on ETFs, options on futures, probably even options on options, we’re not entirely sure.
“Privileges” were options sold over the counter in nineteenth century America, with both puts and calls offered by specialized dealers
Ironically, the industry’s willingness to give users more choices has created a rather significant problem: Trading has dwindled to near nothing in most areas of the options bazaar. Modern-day Thales are gravitating to what they know and like and leaving the rest to expire worthless. Reportedly, there was zero options activity on about 1,400 contracts during March. No surprise the CBOE floor has shriveled from 4,500 people to 440.
The Chicago Board Options Exchange, first to set trade through a guaranteed clearing house, was established in 1973
Things have gotten so bad that more than a bunch of options market makers – specifically, the variety that deal with less sophisticated retail customers – are pulling the plug on anything that’s not automated. We’re not sure if Thales would think that’s a bad thing.
What the markets have been doing…
Other than the NASDAQ, home to so many technology companies, all the major benchmarks moved backwards across the week. Tech stocks, of course, got a nice boost from Apple, surpassed $800 billion – that’s 800 with nine zeroes – in market capitalization for the first time. Poor performance from Disney and Boeing was a particular drag on the narrow-focused Dow Industrials.
A relatively sanguine economic backdrop essentially offset the week’s fresh crop of political uncertainties. Weekly jobless claims defied expectations and fell back to near four-decade lows, while continuing claims reached their lowest level since 1988. Meanwhile, the University of Michigan’s gauge of consumer sentiment, not including ex-FBI Directors, climbed back toward the highs it established in late 2016.
|INDEX||Friday’s Close||One-Week Point Change||Year-to-Date Change|
For some reasons bond traders found little to cheer in the week’s news, leaving Treasuries mostly flat. Investment-grade behaved in similar fashion. High yields, too, moved little, mostly due a quiet new issue calendar. The municipal market, on the other hand, posted decent gains amid a good slate of new issuance.
|FIXED INCOME||Period||YTD||12 Months||Yield|
|U.S. Investment Grade||-(0.2)%||2.1%||2.5%||3.3%|
|U.S. High Yield||-(0.1)%||3.8%||13.9%||5.7%|
What Fund Architects has been doing…
Amid extremely low volatility, global risk assets rose on strong earnings while bond prices fell moderately on prospects for a June rate hike. Against that backdrop, the Fund Architects portfolios closed out a great April.
Even though U.S. equities have had a strong start to the year, we still see opportunity in several parts of the global market. It’s reasonable to think gains will be tougher to come by, which suggests that sector selection and a disciplined process will become even more important tools for investors.
What the pundits have been saying…
“Markets may be in a situation somewhat akin to a coiled spring. We don’t know exactly what factor, event, or combination of actions could release the possible pent-up revaluation of markets, but we think that there has never been a larger (and more undeserved) spirit of financial market complacency.”
New York-based multi-strategy firm Elliot Management
What people have been saying…
“Are you too big to manage your industry?”
Rep. Albio Sires (D., N.J.) questioning United Airlines CEO Oscar Munoz during a marathon congressional hearing.
What the numbers are saying…
The surge in Facebook’s first-quarter profit as the social network continues to sweep digital advertising, despite unrest among marketers about how their advertising is handled.
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