Market Volatility Boosts Options Volume
As stock-market volatility spiked in August, more market participants turned to options as a way to hedge against fluctuating equity prices.
Equity markets churned in August, as investors questioned China’s economic growth story and awaited an interest-rate increase from the Federal Reserve. In options, trading volume averaged 20.3 million contracts per day in the seasonally slow final summer month, 25% more than the 16 million daily average in January through July, according to OCC data.
Options market participants and exchange operators say there is significant room for growth in order flow, as more traders and investors embrace the notion that options can mitigate risk, rather than add to it.
In a commitment to supporting this growth, NYSE Options and the Options Industry Council recently hosted their fourth annual Thought Leadership Forum, an event aimed at giving advisors the tools necessary to begin to integrate options strategies into their portfolios.
In his opening remarks at the event, Steve Crutchfield, who heads NYSE Group’s Amex and Arca options exchanges, recounted a recent conversation with an equity manager who was looking for protection from market declines, but didn’t realize such portfolio insurance could be obtained via the purchase of protective put options.
“We as an industry struggle with the false narrative that options are risky and only for the super-sophisticated,” Crutchfield said Oct. 7 at the forum.
Speakers on a panel about options and volatility noted two broad approaches to trading options: an equity-centric approach that starts with consideration of a stock position, and an options-centric approach that focuses on the specifications of the options contract.
“With about 150 advisors in the room, we are aiming to provide insight into the diverse ways that options can provide support and protection in times of high volatility for all kinds of investors,” said Jim Hyde, Head of Business Development, NYSE Options.
Dennis Gartman, founder of The Gartman Letter, said he keeps his equity-centric options-trading strategies “extraordinarily simple,” and finds options “very effective in moderating positions as you build them.”
Gartman looks at the CBOE Volatility Index as his market weathervane — if the VIX is above 20, Gartman’s propensity is to sell put options on expectations of a rise in the underlying security; if the number is closer to 10, buying puts may be indicated.
Jon Najarian, co-founder of OptionMONSTER, follows institutional options buying in sizes of 500 to 1,000 contracts, as well as open interest, or the total number of options contracts that are not closed at any given time. Najarian said options are best used to “lock in a profit or eke out a little more return,” and he spoke highly of the predictive ability of the derivative securities.
“There are so many good ‘tells’ in the options market,” he said, citing as an example very expensive out-of-the-money put options on Lehman Brothers and Bear Stearns ahead of the global financial crisis.
Some traders rely on quantitative strategies that buy and/or sell options when volatility reaches certain levels. “Everything is pre-planned and goes according to the algorithm,” said Taylor Lukof, chief investment officer of ABR Management. “Data is what’s most important.”
If the VIX is low, ABR is inclined to sell volatility, and buy when the so called ‘fear gauge’ is on the rise. New York-based ABR sometimes utilizes a simple strategy called an options strangle, which means buying both a call and a put option to generate profit with price movement of the underlying security, agnostic to the direction of the price movement. “It’s all about being dynamic,” Lukof said.
To that end, active investing using options strategies such as buy-writes, condors, and butterflies has generated a return of about 7% to 8% year-to-date, compared with a negative return of a few percentage points for the benchmark S&P 500. That’s according to Ilya Feygin, managing director of agency broker-dealer WallachBeth.
“This year you needed to be active in locking in your gains and putting stops on your exposures,” Feygin said. That’s in contrast to a ‘set it and forget it’ strategy, which may work well in placid markets but not in times of turbulence.
Hyde ended his closing remarks for the event by reminding the attendees that NYSE and The OIC will continue the Thought Leadership Forum series in 2016, expanding to an even broader group of advisors interested in gaining further insight about options strategies.
Featured image by James Steidl/Dollar Photo Club
Experts caution the buy side about unrealistic expectations.
How can securities brokers differentiate?
New MarketAxess COO says market development is at an early stage.
Tailoring equity-trading strategies to client specifications is a work in progress.
Cantor Fitzgerald cites execution quality, customization, and access to liquidity as trading differentiators.