Institutional buy-side firms are much more comfortable trading options compared with a decade ago, driven by greater awareness and education that has diminished the perception that options are inherently and overly risky.
The uptake has been partly driven by the boom in retail options trading.
“Options are becoming more mainstream, and this bleeds over to the institutional side,” said Sean Truett, Senior Vice President, Strategy and Business Development at BOX Options Market. “We’re building off retail.”
Truett spoke Friday morning on the Institutional Perspectives on Today’s Options Market Panel at the Options Industry Conference in Nashville.
Megan Morgan, Head of Market Structure at proprietary trading firm Belvedere, noted that a decade ago, a pension fund manager might agree conceptually that options would help the portfolio, but getting approval from the board would be a no-go. Today, that same pension board member and/or family members might have their own Robinhood brokerage account.
“It’s easier for PMs to educate their board, because they’re more aware of options,” Morgan said.
Matt Weinstein, Senior Derivatives Salesperson at Citadel Securities, said back in the early 2000s, the few institutions that did trade options generally did so either to hedge or for leverage. Now, institutions trade options to generate alpha, and more investment decision makers within the firms are on board.
“The ‘new age’ portfolio manager who knows equity, fixed income, FX, or CDX [credit default swaps], also understands the value of trading options,” Weinstein said. “The growth of the options market owes a lot to how the PM has evolved.”
Institutions are gradually adding more complex options strategies, and there’s some systematic trading as well, Truett said.
The panel discussed the rise of flexible exchange (Flex) options, nonstandard options that allow the writer and purchaser to negotiate terms.
There is demand and room for growth, as the bespoke nature of flex options makes it attractive. But Weinstein termed it a translucent market – not as transparent as exchange-listed options, not as opaque as OTC – that would need to move toward transparency to accelerate growth.
Lastly, the panel discussed zero days to expiration (0DTE) options, which now comprise about 20% of retail flow.
Institutions are involved in 0DTEs, but they’re using them for technical rather than speculative purposes, Weinstein said.
Truett said 0DTEs have helped volumes and spreads are tight. “At this point right now, it’s healthy, and everybody loves the volumes,” Truett said. “Hopefully it’s sustainable.”
Morgan offered a longer-term view, in that options market operators and trade handlers are trying to determine the trajectory of 0DTEs. “Is everyone going to do this and it’s going to 40% [of retail flow]?” she asked. “If it does, how do you manage that from a risk perspective?”
