What's Behind ETF Options Volume Growth?

01/12/2016 8:00 am EST

Focus: OPTIONS

While a lot of focus on the ETF phenomenon has centered on their inflows and trading growth, Eric Balchunas and Tracy Alloway, on BigTrends.com, analyze what may be behind the fact that they are also becoming the epicenter of the equity option market.

As investors rush to protect their portfolios in a tumultuous start to the year, odds are they will be using options on exchange-traded funds to do it.

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While much of the recent focus on the ETF phenomenon has centered squarely on their inflows and trading growth, they are quietly becoming the epicenter of the equity option market.

ETFs now account for about 70% of all equity option volume or $770 billion of the approximate $1.1 trillion traded per day, using a sample of the past 20 trading days. That's double what the average volume was five years ago, at a time when more people than ever are buying and selling puts and calls on ETFs than they are on individual stocks.

The option volume of ETFs relative to stocks is effectively the reciprocal of overall equity trading-where ETFs make up about 30% to stocks' 70%-as illustrated in the two charts below.

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The juggernaut behind this outsize volume is the SPDR S&P 500 Trust ETF (SPY), which by itself accounts for $554 billion-or nearly half-of the $1.1 trillion traded each day in equity options. And that's out of a universe of nearly 1,000 equities that have options tied to them.

The table below shows the most active equities and the difference between their actual trading and their option trading. This highlights the fact that SPY accounts for only 13.6% of equity trading but an outsize 47.6% of option trading. This jump-to $554 billion-is a 100% increase from just five years ago.

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Where is all this liquidity in SPY options coming from? As with flows, it's difficult to pin down exactly where ETFs are luring activity from, since all trading in such funds is anonymous. Nevertheless, some of it is coming from individual stocks themselves, which, overall, have seen a decline in option volume over the years relative to the whole market. In addition, SPY is most likely sucking volume away from options on S&P 500 Index futures, which trade about $160 billion a day.

To read the entire article click here.

By Eric Balchunas and Tracy Alloway, Contributors, BigTrends.com

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