Why the Disparity in Index vs. Equity Options Volume Growth?

The emergence of the global pandemic COVID-19 in the first quarter of 2020 caused severe economic and capital markets shocks. This turmoil was evidenced by heightened volatility and spikes in volumes in U.S. options markets. In light of the health crisis, many exchanges temporarily closed their physical trading floors. This included the Cboe exchange (floor closed March 16), which executes >99% of index options volumes.

While markets remained opened and functioning as a whole, we wondered what impact the floor closings had on order execution, particularly for more complex orders. We analyzed this question in our May report, “A Deeper Look at US Listed Options Volumes.” We found there was a decline in index options, while equity options volumes were increasing throughout the year.

With the Cboe trading floor now reopened since June 15, we revisit index options volumes trends throughout 2020.

Executive Summary

In general, options volumes increased with market turmoil, and remain elevated in 2020. Total options monthly ADV peaked in June at 30.9 million contracts. Full year ADV is up 45% Y/Y, with an average monthly increase of 47%. Yet, the increases in volumes continue to not be equal across products:

• Equity: Full year ADV is up 50% Y/Y, average monthly increase 52%; peaked in June at 29.2M contracts, +32% to January ADV and +70% to 2019 ADV
• Index: Full year ADV up 6% Y/Y, average monthly increase 3%; peaked in March at 3.2M contracts, +60% to January ADV and +77% to 2019 ADV
• Index volumes have been on the decline since March, every month from April to August had a Y/Y decline

The difference in volume trends is not equal across specific index options contract suites either:

• SPX: Full year ADV +5% Y/Y, average monthly increase 5%; but volumes have been on the decline since April, each month from May to August saw a Y/Y decline
• VIX: Full year ADV + 4.5% Y/Y, average monthly change -2%; Y/Y volume declines in April, May, July and August, with June positive at +3%
• SPY: Continues to perform well with full year ADV +71% Y/Y, average monthly increase 75%; positive every month, until seeing a slight decline in the first half of August (-1%)

On one hand, market participants attribute some of the decline in index options volumes, and specifically the SPX and VIX decline, to the acceptance of over-the-counter (OTC) trading. This was forced upon traders during floor closures, yet it is viewed as working for now. A larger factor impacting index volumes is the explosion of retail trading, estimated up ~50% to last year. Retail investors mostly trade the SPY, not the SPX. Additionally, retail money has been chasing story stocks, such as Tesla (TSLA) and Apple (AAPL).

If you remove the growth of all these story stock contracts, the growth disparity in equity versus index options would come down. That said, market participants do not expect much change in index volume growth for the rest of this year. With retail remaining hot, SPY and, more prominently, equity option volumes will continue to grow. The equity versus index options volume growth disparity will persist.

Download the full report for:

• Market Volumes (A 2020 vs. 2019 Comparison)
• Contract Volumes: SPX & VIX vs. SPY
• Why the Decline?
• Appendices: Market Volumes & Volatility, Market Landscape and More

 

 

Author

Katie Kolchin, CFA
Director of Research
SIFMA Insights

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