04.18.2018
By John D'Antona

Northern Trust’s Cherry Speaks on Options

While the bevy of financial market news focuses on cryptocurrencies and Presidential tweets targeting specific companies, there is one segment of this universe that is flying under the radar. And successfully.

Options.

Jon Cherry, Northern Trust

Options volumes have been steadily rising of late as investors continue to use them as an alternative to higher-priced equity securities and in some cases, part of multi-legged and multi-asset strategies designed to both add alpha and act as hedging vehicles. Jon Cherry, Head of US Options at Northern Trust Capital Markets, took some time out of his schedule to discuss with Traders Magazine’s editor John D’Antona Jr. the state of the sector and the trends he sees. He believes in low volatility strategies – as rates rise, dividend yields go up, with options offering enhanced performance. Prior to Northern Trust he was the Head of Trading at TJM Investments.

Here is an edited version of the conversation:

Traders Magazine: What’s the state of the options market now and what are the prevailing trends that you are seeing?

Jon Cherry:         For us, it’s pretty much business as usual. The reason why I say that is the type of activity that we see from both our asset owner clients and our asset manager clients is such that our clients don’t tend to get spooked by what I call the headline type of trading. Now, that being said, with the increased level of volatility that we’ve had, there are often times that you might see more opportunistic trades come through.

TM:                       No one is spooked by this spike in volatility?

Cherry:                No. In some instances, I would say it’s almost a welcome sign to go back to historically normal levels of VIX volatility.

There have been some conversations about what happened in the early part of the first quarter with some of the securities products that didn’t respond so well to the volatility and things like that. But, the thing that was most commonly talked about was that a lot of people in our industry, while we’ve been around for a long time, some newcomers haven’t seen a market with increased interest rates, or sustained elevated levels of volatility.

TM:                       What types of options products are popular these days? Weeklies? Or are more traditional options products still en vogue

Cherry:                Yes, weekly options, specifically in broad-based indexes, are increasing in popularity. From our viewpoint, it’s a welcome sign to be able to have more of the listed offerings available for your systematic and/or rules-based type strategies. However, most commonly we’ve seen, still, options overall volume is in the broad-based Index/ETF space with traditional 30-day to 60-day expiries.

TM:                       Are there any new products that are out there that I should be aware of? Should we be expecting a bitcoin option soon?

Cherry:                I do think that the market is ever-evolving and CBOE has done a really good job of making sure that they’re targeting not only traditional options investors, but also the next generation of investors using options. Adding new indexes within the VIX complex, and most recently their listing of Bitcoin Futures are two examples of how I think they’re showcasing innovation and appealing to both audiences. For purposes of the clients that we serve at Northern Trust, we continue to see the trend of institutional investors using option-based strategies to achieve equity-like returns on a risk-adjusted basis. More specifically,  we have seen a significant increase in volume and interest in the broad base Index/ETF space. Clients are looking to either hedge exposure or look to capture that volatility risk premia via broad based ETF options by taking on less risk within their portfolios.

 

TM:                      So, ETF options are gaining acceptance?

Cherry:               Yes, very much so, and not only that, but I think we’re still in the beginning stages of this trend. I think it will continue for many quarters to come.

 

TM:                       What makes the ETF option so popular? Does it hedge better against what traders are using or is it just in ETFs that you’re getting much more exposure via the option structure?

Cherry:                I think it’s more the latter than the former. The ETF allows you to, one, get the broad exposure via options, whether you’re short volatility or long volatility lean, you could be able to achieve a desired exposure taking on less risk. I think that is what’s popular when you’re looking at solutions as an asset owner – especially if the fiduciary responsibilities are outsourced to a third-party manager. That is showing them ways that they could get equity-like return taking on less risk.

 

TM:                       Looking ahead, are there any other trends out there in options that we haven’t talked about so far?

Cherry:                Yes. We touched on it briefly, but to expound a bit, the increased level of broad volatility we have experienced has created more opportunities for investors to consider option-based solutions. We are meeting with clients who are regularly discussing ways we may be able to incorporate options solutions within portfolios. For example, a long only equity investor who has a long-term time horizon for their holdings to become fully valued, may benefit from looking at hedging strategies and the benefits and risks those solutions could provide.

Another subset is when you’re looking at traditional overlay opportunities. These folks, who’ve gotten, for lack of a better word, “beat up” for many years because we’ve been in such a strong rising and fairly predictable market, are now  growing in popularity. Looking at traditional overlay strategies (selling covered calls) as a means to capture premium income within your portfolio can help active and partial hedging within your equity investments.

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