Volume is up for the ninth straight year in the options industry, but there’s a big difference this year.
Of the 21.6 percent increase in total year-over-year volume through October, over a third of the growth is coming from contracts that expire weekly. That makes weeklies one of the most successful product launches in the industry’s history. Since the creation of the listed marketplace in 1973, most options contracts have expired monthly.
“There’s been a huge jump in volume since the product was launched nearly 18 months ago,” Steve Crutchfield, chief executive of NYSE Amex Options, told Traders Magazine.
In the 10 months through October, weeklies accounted for 9.1 percent of total volume, according to data provided NYSE Euronext. That’s up from 1.8 percent in the same period last year.
The final tally for the year is likely to be even higher, as a big chunk of the available classes only began trading on a weekly basis in September and October. In September, total volume attributable to weeklies was 10.6 percent, according to NYSE Euronext. In October, that figure was 12.2 percent.
Weekly volume can be even higher in some of the individual classes. In Netflix options, in October, for instance, weeklies comprised about 40 percent of all contracts. Trading in weekly SPY options in October was 23 percent of the total, while trading in weekly options on Apple, Inc., was 27 percent.
(The percentages are of total industry volume. It is important to note however that weeklies only trade 40 weeks of the year. They do not trade during the third week of the month when the monthly contracts expire. Therefore, percentages would be higher if weeklies were only compared against total volume during the weeks in which they trade.)
Although the exchanges have had the authority to list weekly options since 2005, they only began in earnest in June 2010. From a handful of available classes then, the number of weeklies has jumped to about 100. The listings are typically of the more active names.
It has been the addition of new classes that is propelling the growth in trading, according to industry sources. “We opened up the floodgates,” explained Paul Stephens, director of international and institutional marketing at Chicago Board Options Exchange.
That was especially true in recent months. According to the Options Clearing Corporation, 31 new names were added to the roster in September and October. Each exchange is limited by the Securities and Exchange Commission to 15 listings apiece, but once listed they are tradable by any exchange. A few of the nine options exchanges have decided not to exploit into their allotments.
The popularity of the product has exchanges chafing at the SEC’s restrictions. Their brokerage customers are clamoring for new listings or complaining when one listing is dropped in favor of another. “We would like to expand the program,” Stephens said. “There is certainly customer demand.”
The CBOE was the driver behind the Short Term Option Series Program, as it is called, becoming the first and only exchange to list weekly options (on indexes) in 2005. The program stagnated, however, as the irregular symbols used to denote weeklies caused complications for brokerage back offices. “Firms’ back offices were very much against weeklies,” Stephens noted, “and some of their front offices as well.”
But with the OCC-driven symbology effort, completed in May 2010, the door was thrown open to weeklies. Now all weeklies share the same root symbol with the regular options. That makes it easier for brokerages to process trades and customers to find specific contracts.
Charles Schwab & Co., which began its weeklies program in January of this year, has seen its active-trading customers jump on the new product. “It’s been dramatic,” said Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research. “Once we started offering them, our clients embraced them very quickly and our volumes rose very sharply.”
Frederick points out that over half of all trading in monthly options occurs in the final week of the cycle. Given that, it’s a natural that traders would migrate to weeklies, Frederick said. “You provide a lot of opportunities for people to do things that they were only able to do once a month in the past,” Frederick said. “That creates an enormous amount of flexibility.”
Crutchfield points out that weeklies allow both buyers and sellers to fine-tune their approaches to specific events, such as earnings announcements. Traders can take positions in the week of an occurrence rather than weeks in advance. For buyers, that reduces the premiums they must pay since premiums typically drop the closer the option gets to expiration. “That’s the advantage of the product,” Crutchfield said.
Also contributing to the surge in interest this year has been relatively high levels of volatility, especially since August. The appeal is to both buyers and sellers of options. Higher volatility translates into higher premiums, which are attractive to sellers. High volatility also means a greater chance for profit for buyers as stocks bounce around more.
The product is not limited to retail traders. “When weeklies came out, most people assumed they would be used for speculation,” Eugene Kearns, an executive in Credit Suisse’s Advanced Execution Services group, said at this year’s meeting of the Chicago chapter of the Security Traders Association. “But it has turned out that institutions use them for risk management purposes as well.”
CBOE’s Stephens agrees that demand is coming from institutions, but mostly short-term oriented hedge funds. Investors with longer time horizons opt for monthlies when writing covered calls, for instance, he said.
For CBOE, hedge funds are behind much of the trading in the weekly version of the exchange’s venerable S&P 500 Index product, the SPX. Trading in weekly SPX contracts has accounted for between 8 percent and 10 percent of total SPX volume—CBOE has a monopoly on SPX trading—this year during the weeks that weeklies trade.
That’s up sharply from last year when weeklies accounted for between 2 percent and 4 percent of total SPX volume. The reason for the upswing is because of changes CBOE made in December 2010, according to Stephens. First, CBOE changed the SPX weekly from an A.M.-settled contract to a P.M.-settled contract. Second, the exchange made it easier to trade the contract electronically.
“The customer for the weekly SPX is more of a hedge fund type,” Stephens said, “and more online.”
Some of the volume in weeklies has come at the expense of volume in comparable monthlies, industry sources acknowledge. Still, opinions diverge as to how much. Frederick and Stephens say very little weekly volume is “cannibalistic.” NYSE Amex’ Crutchfield says his unit has done some research, but is unable to quantify the shift.
“It’s difficult to quantify,” Crutchfield said. “You’re playing counter-factual. What would volume have been if there were no weeklies? I think there is a pretty healthy mix of new volume. Still some has moved away from the front month.” Combined, NYSE Amex and NYSE Arca trade about a quarter of all weeklies volume, according to NYSE Euronext statistics.
Whatever is driving the volume, weeklies have become one of the industry’s hottest innovations, arguably in the same league as contracts on the S&P 100 and S&P 500 indexes (1983); the advent of electronic trading and the International Securities Exchange (2000); and the contract on the VIX (2007).
Certainly, the product has taken off. “Within the first month our expectations were exceeded,” Schwab’s Frederick said. “The activity was double what we thought it would be.”
