Options records a reflection of global events
By Derek Sammann, senior managing director and global head of commodities & options products, CME Group
Options
trading is growing rapidly, and for good reason. We are seeing seismic
shifts in volatility potential coming from a wide variety of sources. The
Fed is likely to end its quantitative easing program soon, setting up a debate
in the market about the timing of when zero short-term rates might be
abandoned.
Equities
went from new high to new high for the past few years, but a decelerating China
and deflation possibilities in Europe have brought more volatility. And
FX markets are now alive as the U.S. and U.K. economies outperform Japan and
Europe. Options come into their own as risk management tools when volatility
regimes are in motion.
Indeed, earlier this year,
the research firm Tabb Group released a paper outlining why options on futures
was a market primed for expansion. The prediction was
based on factors like changing interest rate policies, the increased
electronification of options and underlying futures becoming more attractive to
investors.
All of these factors bring
more participants, which means more liquidity, and makes positions easier to
enter and exit. Options on futures are a lower cost, more flexible way to
manage exposure to all kinds of markets.
Post-financial
crisis, we’ve seen the popularity of options grow across all asset classes,
from around 30 million total options traded monthly five years ago to around 50
million monthly this year – an average daily volume of nearly 2.5 million in
2014.
But in September, the strong
growth Tabb’s report predicted was fully realized. The month saw increased
trading, including several average daily volume (ADV) records, across CME
Group’s options complex, including agriculture, equities, interest rates and
foreign exchange – to reach an all-time record options ADV of 3,087,724.
This beats the previous monthly record set in January 2008 by over 30,000
trades per day.
Anyone predicting an options
explosion was spot on, but for so many varied asset classes to achieve such
high levels of trading volume at the same time?
That
took many factors converging at once to influence everyone from farmers to
hedge fund managers to trade. A review of the records we saw in September could
serve as a review of world events for the month:
FX Options (record ADV 110,226): On Sept. 4, the European Central Bank surprised everyone by
cutting interest rates to record lows, which spurred record trading in
Euro/U.S. Dollar options. That mixed with close polls in the Scottish
Referendum vote – which sparked record British Pound/USD options – and
the upcoming election in Brazil led to a single day record of $32.4bn in
FX options traded on Sept. 4.
Weekly Treasury Options (record ADV of 95,110): For the second consecutive month Weekly Treasury Options saw
record trading, and again it can be largely traced to the Federal Reserve’s
perspective on interest rates. Ahead of the Fed’s September meeting, and
following it, with Fed Chair Janet Yellen’s “considerable time” language,
market participants wanted to manage their exposure to rates staying flat for
the foreseeable future.
E-mini S&P 500 Weekly
Options (record ADV 139,315): Increased volatility within
the stock market during the month led to increased short-term hedging and
trading opportunities through the use of Weekly E-mini S&P 500 index
options, as volatility began the month just over 12%, and ended the
month at over 16 percent.
Agricultural
options (302,914, 40 percent increase over Sept. 2013): saw
strong growth during the month as well, led by soybeans options, which were up
55% over August in terms of average daily volume. The market is
expecting record corn and soybean harvests this year, which has resulted in
additional customer hedging using options to manage price risk. We’re
also seeing strong growth in newer non-standard options like our weekly agricultural options.
Geopolitical and
macroeconomic events may have triggered much of the trading in September. But
as Tabb’s report suggests, expanded availability of electronic trading had a
lot to do with making those records possible:
“Electronic
markets now offered by exchanges provide many wholesale market benefits
including an open playing field that leads to more efficient and seamless
executions. Electronic trading currently accounts for more than half of total
futures options volume, up from just 13% in 2009. As trading increases, markets
tighten and better execution tools facilitate automated executions, electronic
trading will continue to dominate overall futures options volume.”
A record 30.1m options were traded electronically in September. As global events
continue to signal uncertainty across all of these markets, we could see that
number increase in the near future, as options continue to climb in popularity
among market participants of all kinds.
Found this useful?
Take a complimentary trial of the FOW Marketing Intelligence Platform – the comprehensive source of news and analysis across the buy- and sell- side.
Gain access to:
- A single source of in-depth news, insight and analysis across Asset Management, Securities Finance, Custody, Fund Services and Derivatives
- Our interactive database, optimized to enable you to summarise data and build graphs outlining market activity
- Exclusive whitepapers, supplements and industry analysis curated and published by Futures & Options World
- Breaking news, daily and weekly alerts on the markets most relevant to you