Options Industry Trends
After today’s 30-point slide, the S&P 500 is just five points above the levels seen at the end of June 2011. Six trading days remain in June 2012 and the S&P 500 might very well end the month very near the levels from 12 months ago. Also, interestingly, VIX hit a low of 16.77 today, which was also the high recorded on the last trading day of June 2011. While the tone of trading has changed a lot during that time, the S&P 500 and VIX are not much changed since June 2011 and many of the same worries dominate the market. There also seems to be a growing sense of disenchantment among investors that is being reflected in a slowing of overall trading activity.
The second quarter of 2011 ended on a strong note amid optimism for Europe and upbeat domestic economic news. On June 30, 2011, European stock benchmarks and the euro moved solidly higher after Greek parliament passed a second austerity bill designed to prevent debt default. In the US, the Chicago PMI showed a surprise jump to 61.6 in June, from 56.6 the month before and significantly better than the 54 that was expected.
Fast-forward to today, a very rough day on Wall Street, as poor economic data and worries about the banking industry conspired to send stock prices broadly lower. The Philadelphia Fed Survey was especially shocking. The gauge of regional manufacturing activity fell to -16.6 in June, from -5.8 last month and well below expectations of .-2%. A decline in China’s PMI for June, to its lowest levels since March 2009, added to worries about the global economy. Meanwhile, news agencies were reporting that Moody’s will release downgrades of major banks today, which it did after the closing bell. Plummeting commodities prices, including a 4% loss in crude to less than $79 per barrel along with a drop of nearly $50 in gold, added to the pessimism about the global economic backdrop.
The seesaw action continues and, not only is the S&P 500 at the same levels as it was roughly one year ago, it’s at the same levels as four years ago and really not far from where the index stood a dozen years ago. Until recently, the lack of real progress in the US equity market seemed to have no impact on options volumes. Indeed, 2011 was another record year for the industry with 4.6 billion contracts traded. At the current rate, of less than 2 billion contracts halfway through 2012, this year might break a long streak of record-setting years for options activity.
Looking at the overall average daily activity by month (graphic provided – above), average daily volume so far in June is 5.6 percent below the levels seen in June 2011. The biggest decline is in equity options volume, which is down nearly 10 percent. ETF options activity is 2.2 percent off year ago levels. The index market is seeing about 2.3 percent more activity than June 2011. The sharp drop in stock options activity might reflect diminishing activity by the retail crowd, while steady volume in the index and ETF products reflects ongoing participation (hedging activity) by the institutional investors.
Yet, we’re only half way through the year and it is still possible that volumes will increase again into the fall and heading into yearend. The record volume day for the options market ever recorded was on August 8, 2011. Then, activity saw a noticeable uptick again through October 2011. Yet, those periods (Aug and Oct 2011) of high volume were also times of panic and high anxiety on Wall Street. So maybe another year of record options order flow in 2012 wouldn’t be such a great thing.
Category: Market Update
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About the Author (Author Profile)
Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications. As senior analyst, Fred provides frequent and regular notes and daily updates for activity of interest.
