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From Niche Investments to Mainstream: An Expert Reflects on How Options Have Evolved Over 20 Years
Traders Magazine Online News, July 17, 2019
In this candid reflection, OptionMetrics Chief Executive Officer David Hait reflected on spending the last two decades in the derivatives market – how it has evolved from a curiosity to mainstream investment market.
Two decades ago, I founded OptionMetrics to address the need for organized, clean, easy-to-use options data after spending endless hours scrubbing and preparing options data for research. Since that time, a lot has changed in the industry.
Twenty years ago, options were used infrequently among hedge funds, and almost never by mutual fund or pension fund managers. In fact, back in the “old days,” when trading spreads were wide and volume was low or non-existent, options were viewed by the financial community with skepticism, and were often considered a “niche” investment, suitable only for either simple hedging, or high-risk speculative strategies pursued by only a few sophisticated “quant shops.”
Flash forward to today. Options are increasingly used by sophisticated investors and savvy advisors to develop volatility and gamma-sensitive strategies and are leveraged to shape risk and return profiles in everything from hedge funds and investment portfolios to pension plans. A record five billion option contracts were cleared in the U.S. by the OCC in 2018 alone. Much of this increase is due to electronic trading and increased liquidity in the markets. With electronic trading (starting in the 1970s and 1980s) and the ease for investors to get in and out, the dynamics of volatility have made options all the more interesting.
While trading was formerly limited to one major and a few minor options exchanges in the U.S., today options in the U.S. are traded on 16 different exchange venues. Options trading continues to pick up in Europe and Canada, while growth in Asia continues, though more slowly.
Previously unheard of in the mainstream, the terms “volatility” and “VIX” (with the CBOE Volatility Index® launched in 1993) have now become familiar to the public and are regularly talked about by thought leaders and the media.
Insights into the Markets
One of the biggest differentiators with options data today versus 20 years ago, is that there is a lot more of it, with more instruments listed now (OptionMetrics currently tracks options on over 6,000 underlying stocks and indices worldwide, including U.S., Europe, Asia-Pacific, and Canada). With more instruments listed and markets active than ever before, options data and analytics have become more useful as a research tool in reflecting historical and changing market conditions.
The research landscape for options has changed dramatically since Fischer Black and Myron Scholes first published “The Pricing of Options and Corporate Liabilities,” establishing the renowned Black-Sholes framework for pricing options in 1973.
With the ability for options to be more informative about markets and volatility, they are increasingly being used to address a number of questions throughout financeto assess what has happened and will continue to happen in the market. The data is commonly used today in financial and economic research by both practitioners and academics.
Where once very few published academic research papers used options data, today hundreds of researchers use option data annually—assessing everything from short-selling and stock returns, to corporate valuation and innovation, bank rescues/bailouts, and insider trading.
Similarly, where traditional institutional research analysts might not consider option-based recommendations in the past, today options are often an important component of an analyst’s research tool kit. And we continue to see more new and exciting opportunities for exploiting this unique dataset every day.
The Next 20 Years
What is the future of options and what do the next 20 years hold? What is the future for stocks? There is plenty of ways one can put together S&P portfolios and investment portfolios with options in them. Maybe cross national portfolios, with a mix of multiple countries and options structured to take advantage of that, hedging vol with vol index options--who knows?
Options are interesting, and portfolio managers and investors alike are intrigued by them (it’s what drew me to them in in the first place). With the markets (and volatility) changing seemingly day to day, there is still a lot that we as an industry do not yet know and need to explore. With options experiencing explosive growth and investors increasingly leveraging them, I’m excited to see what the next 20 years will bring.
David Hait is Founder & CEO of OptionMetrics, which this month celebrates 20 years of providing options data. He is an expert in applied quantitative derivative research and technology, a former VP of Fixed Income Research Group at Paine Webber and professor on derivatives at J. P. Morgan. He can be reached at dhait@optionmetrics.com
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