Options records a reflection of global events

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.