Options Trading Volumes Doubled in August

A surge in volatility led traders and retail investors to hedge their positions with listed derivatives in August, according to data from the Options Clearing Corporation. Options trading volume in U.S. contracts doubled in the month of August as compared to the same month a year ago, exceeding half a billion contracts for the first time.

According to data from the OCC, which clears trades for all nine U.S. options exchanges, over 554 million contracts were bought and sold in August, representing a 94 percent increase from August 2010’s 283 million contracts. Also, on Aug. 8, a new record was set with more than 41.5 million contracts were traded, marking the first time that over 40 million contracts traded in one day, according to OCC.

“We know volatility was a big reason for the record volume this month,” said Jim Binder, a spokesman for OCC in an interview. “A couple of years ago, during the financial crisis in September 2008— a month before Lehman went bankrupt— we had huge volatility but we didn’t see this kind of volume,” said Binder who attributes it to the influx of institutional investors as well as retail traders.

Institutions have made big moves into options since the financial crisis of’08, according to Binder. Prior to that, they were satisfied as long as their portfolios outperformed the S&P 500 index, but when the indices dropped 38 or 40 percent, they discovered the risk management potential of options, said Binder.

August volumes surpassed and are 32 percent higher than the previous record of 417 million contracts set in March of 2011. During the month, three record trading days occurred on Aug. 4, 5, and 8th for a combined total of 117 million contracts, reports OCC. The current daily trading volume record was set on Monday, Aug. 8th with 41 million contracts.

Friday’s Financial Times said the data underscores how money managers and retail traders are using options to cope with “sudden market plunges as uncertainty pervades the global economy.” The FT article cited uncertainty caused by the gridlocked political debate in Washington over raising the US debt ceiling and Standard & Poor’s downgrade of the US’s debt rating, as factors causing traders to turn to options.

Meanwhile, U.S. options exchanges are benefiting from the surge in trading activity. As a result, there have been some shifts in market share among the three largest operators, CBOE/C2, NYSE Euronext and Nasdaq OMX, which operate two platforms apiece.

In August, the Chicago Board Options Exchange group in Chicago collectively had about 27.5 percent market share, when both the CBOE’s and the new C2-all electronic New Jersey-based platform are included. While CBOE’s August 2011 share dipped to about 26.2 percent in August, from slightly more than 27.1 percent for the same period a year ago, the addition of C2 boosted CBOE’s group volume by 1.30 percent.

The combination of Amex, and NYSE Arca, the two US options platforms operated by NYSE Euronext, captured almost 25 percent or one quarter of the overall market in August, up from 23.41 percent for the previous August.

Nasdaq’s OMX’s two options venues —OMX PHLX and Nasdaq Options Market (NOM)— had 23.7 percent of the market in August, falling below the nearly 28 percent market share they had the previous August.

Based on OCC’s report, the International Securities Exchange, owned by Eurex, the derivatives arm of Deutsche Borse, had about 17.3 percent market share, down slightly from 18.3 percent a year ago.

Looking at equity options market share (without index options and options on ETFs), NYSE Arca and Amex collectively had 26.4 percent share in August, while NOM and PHLX OMX had 25.8 percent and CBOE/C2 had almost 21 percent.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio