While many investors have been watching stock markets gyrate from all-time highs to near-term lows and back up again, the options market has been setting its own records. Trades in listed options rocketed to a new monthly record in January and February this year, as investors increasingly sought out options to trade, manage risk, and generate income.
Here's a look at the recent trends, as well as what it could mean for options investors.
Record options trading
According to the Options Clearing Corporation (OCC)—the world's largest equity derivatives clearing organization—more than 467 million options contracts were traded in January, representing the highest January options volume ever recorded and a 42% year-over-year increase from January 2017 (see January 2018 OCC cleared contract volume soars table).
That trend continued in February as well, with total cleared contract volume reaching nearly 465 million, a 44% surge over February 2017. The record-setting pace has set up 2018 to potentially be a record-setting year for options trading activity. In fact, as of March 1, average daily volume this year at OCC has jumped 39%, compared with 2017, to almost 24 million contracts per day (see February 2018 OCC cleared contract volume continues hot trend table).
Equity options volume represented the bulk of the trading activity in January: Over 411 million of the 479 million contracts were equity (e.g., stock and ETF) options—a 41% rise compared with January 2017. This includes more than 173 million in ETF options, a 40% increase from January 2017. Equity options volume in February accounted for 460 million of the cleared options volume—representing a 40% increase over the same month last year.
A variety of drivers may have been behind the options activity surge. "Investors and traders seem to be responding to market conditions by making greater use of the versatility of options to mitigate risk, generate income, or trade directionally," according to Frank Tirado, Vice President of Education for the Options Industry Council.
Spiking volatility may have also been a contributor to the surge in demand for options products as investors sought out ways to help manage dramatic price swings. After multiple trading sessions of greater than 3% stock market advances and declines, volatility reached a recent fever pitch on February 6 when the Cboe Volatility Index (VIX)—commonly known as the VIX or the fear index—jumped 116%, the largest one day move ever.
Potential implications for the hot start
The consequence of increased trading volume may prove fruitful for options investors. Higher options trading volume has historically translated into greater liquidity, leading to potentially narrower bid-ask spreads and better pricing on options contracts. Of course, higher volumes and greater liquidity are not reflected in all options listings, and higher volumes may also translate to higher premiums (i.e., the cost of an option). The reason is that more demand (a component of higher options volumes) for options can contribute to an increase in premiums. Consequently, you should consider pricing—among any other relevant factors for your individual strategy—when assessing options trading opportunities.
Moreover, there is no guarantee this trend will continue. Early March data indicates that increased options trading activity continues to persist, but the volatility that may have played some role in greater options volumes during the first couple months of the year has subsided in recent weeks.
ETF and index options gain traction
Another trend that’s been prevalent recently is the preference for ETF and index options. Given that there are now more market indexes than stocks, this trend is also reflected in the options markets.1 About half of the options volume in 2017 was ETF and index options, according to volume figures from OCC.
"ETFs continue to be one of the investment products of choice for many investors, and options on ETFs allow active investors to further refine investment holdings," Tirado says. "Among other uses, ETF options can help manage risk during uncertain times and help generate income in a still low yield environment."
While equity options accounted for the majority of the demand in January, index options showed massive growth, continuing their strong trend from last year. Indeed, over 56 million index options were traded in January, representing the highest monthly total ever and a 52% rise compared with January 2017. Index options skyrocketed 70% year over year in February.
Finding your options
How to use options
2018's quick start for options demand builds on the trend from the prior year, which also saw options volume on the rise. 2017 US-listed options volume climbed 3.1% year over year, propelled to the finish line by a 7.2% fourth quarter increase, compared with the fourth quarter of 2016.2
Of course, it's important to recognize that trading options is more complex than investing in stocks. Not only should you have a plan to trade options, you should fully understand the risks and know how options can fit into your overall investing and trading strategy. Only then should you consider trading options in your portfolio. For more information on options strategies and how they work, you can visit Fidelity's Learning Center.
If you are interested in researching options, you can utilize the options research on Fidelity.com. Among the tools at your disposal are the options chain (login required), options market commentary, and options trading ideas (login required).
One of the tools that you’ll find in the trading ideas section is the Market Scanner, provided by LiveVol, that can search for heavily traded options by criteria such as high options volume, high open interest, and other filters that seek out in-demand options contracts. You can also sort by implied volatility, order flow, and time spreads, among other filters.
Next steps to consider
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Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request.
There are additional costs associated with option strategies that call for multiple purchases and sales of options, such as spreads, straddles, and collars, as compared with a single option trade.
Past performance is no guarantee of future results.
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