Weeklys drive options volumes growth

(ft.com) When Tom Sosnoff first approached the Chicago Board Options Exchange in 2005 with the idea for weekly options, he had in mind what he thought was a terrific marketing gimmick.

“I wanted to call them ‘quickies’,” recalls Mr Sosnoff, who came up with the idea while running Thinkorswim, the online options brokerage he co-founded in 1999. “I thought it would be good for business, but they thought it had too many sexual overtones.”

While he concedes the CBOE may have been right to reject his naming idea, contracts with a weekly duration are the raciest thing to have happened to the options industry in several years.
US regulators gave the CBOE permission to launch weeklys on stock indices in 2005, but the contracts only took off last year, when the pilot programme was extended to weekly options on individual shares and exchange traded funds.

At the same time, the stock tickers used to identify options were being overhauled, making it easier to link a weekly option with the more traditional monthly or quarterly expirations on the same underlying name.
The result has been an explosion in trading. Weekly options volumes had been growing steadily, reaching about 3 per cent of overall SPX (S&P 500 options) volumes by early 2010, but in the past year they have become the fastest-growing options product, now accounting for about one-10th of all options volumes in the US.

In some single stocks, such as Apple, weeklys now make up two-fifths of all options volume.
Indeed, the expansion of trading in weeklys has been a significant driver of overall options volumes, helping to put the industry on course for a record year, with 3.1bn options contracts changing hands so far, up 22 per cent on last year.

“Without weeklys, we wouldn’t have had any growth at all this year,” says Boris Ilyevsky, managing director of the International Securities Exchange, the US’s third-biggest options-trading venue, owned by Eurex, the derivatives arm of Deutsche Börse. “In fact, we would have had a decline.”
Weeklys are also proving a big hit in futures. CME Group, the US’s biggest futures exchange, now lists weekly options on futures on stock indices and interest rates, as well as agricultural products such as maize, soya beans, wheat and cattle.

In the world of equity options, weeklys have proved particularly popular with retail customers. In particular, they have found favour with active, more sophisticated investors, whose strategies – such as earning premiums by selling covered calls on shares or ETFs that they intend to hold for the longer term – are an ideal fit with the accelerated “time decay” the contracts offer.

“Every week, you now have the ability to trade as if it was expiration week, and there’s a lot of clients that have expiration week strategies,” notes Paul Stephens, the CBOE’s director of institutional and international marketing.

Many such traders have been able to profit from the growth of weeklys, by collecting more in premiums from selling calls every week rather than once a month. For traders on the buying end, weekly options offer a lower-cost, more flexible alternative to longer-dated contracts.
Because of the increase they have brought in volumes, the growth in weekly options has also been welcomed by options exchanges and brokers.

However, in spite of the signs that weekly options have brought new business, they have also cannibalised some volume from longer-dated traditional options markets.
Weeklys have also fragmented liquidity further – reinforcing a concern voiced by exchanges when the contracts were introduced. They have also added considerably to electronic bid-and-offer messages that market participants have to support with ever more processing power.

Nevertheless, the march of weeklys seems unstoppable. The programme may well be expanded from its current regime, which allows each of the US’s nine options trading platforms to list 15 weekly options of its own, as well as those listed by competitors.

That begs the question of whether options contract durations could shrink further. Last year, the CBOE sought regulators’ permission to list daily options, but the Securities and Exchange Commission has yet to rule. If the equity options industry introduced dailys, it would be following the futures markets: CME offers daily options on futures on crude oil, natural gas and gold.

The idea of dailys disturbs some observers, who argue they would lead to pure “directional betting” not founded on the fundamentals of the underlying asset. “If we go to dailys and hourlys and micro-events, eventually someone will get hurt – not because there’s anything technically wrong, but people would get uncomfortable as it would feel and look more like gambling,” says Mr Ilyevsky.

Mr Sosnoff, who now runs Tastytrade, an online financial network, is dismissive: “It’s ridi­culous. If it’s true, then all trading is gambling. Dailys are inevitable.”