In the first half of 2013, the average daily volumes (a.d.v.) for key index call options rose significantly when compared to the first half of 2012 – the a.d.v. for calls on the S&P 500® (SPX) rose to 340,912 (a 35% jump), and a.d.v. for calls on the CBOE Volatility Index® (VIX®) rose to 389,874 (a 48% jump).
In comparison, over the same periods the a.d.v. for SPX options rose 15% and for VIX options rose 21%.
FACTORS IMPACTING CHANGES IN DEMAND FOR INDEX CALLS AND PUTS
I recently asked some market experts about factors this year that might impact the changes in investor demand for index calls and puts in 2013. Here are some of the many factors that were cited —
(1) Rise in the S&P 500 Index. The SPX Index rose in each of the first five months of 2013 and was up 12.6% in the first half of 2013.
(2) Low Historic Volatility of SPX Index. The 30-day historic volatility of the S&P 500 Index fell to 7.28 on February 15, 2013, its lowest level in more than two years. In the first half of 2013 the highest level of 30-day historic volatility for the SPX Index was 15.91 on June 27. In the 1st half of 2013 the worst one-day drop for the SPX Index was a 2.5% fall on June 20th, while in 2011 the SPX fell more than 2.5% on a dozen different days. (Source: Bloomberg).
(3) Relatively Low Values for VIX Index. Since 1990 the average daily close for the VIX Index was 20.3, but in the first half of 2013 – (1) the VIX average daily close was 14.2, and (2) the VIX closed above 20 on only two days – June 20th (at 20.49) and June 24th (at 20.11).
(4) Low and Rising Interest Rates. During the recent period from May 2nd to July 5th –
(a) the yield on the 10-year U.S. Treasury note rose from 1.63% to 2.74%,
(b) the Citigroup 30-year Treasury Index fell by 14.4%, and
(c) the CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (VXTYN) rose from 3.95 to 8.18 (a 107% jump).
(5) More Interest in and Comfort with Index Tools. While in the late 1990s many investors were stock-picking proponents, in the past decade many more investors have become users or index-based products such as ETFs and index options.
Customer Demand for Index Options in 2013. How have the above factors influenced investor demand for SPX and VIX options so far in 2013? The fact that the SPX had low historic volatility and rose the first 5 months of 2013 — (a) stimulated some bullish SPX call buying as some investors become more optimistic, and (b) stimulated some frequent rolling of some short index call options as the SPX index rose. The fact that the growth rate for the SPX puts was 15% (vs. 35% for SPX calls) could have been impacted by the low volatility for the SPX in the first half of 2013; the fear for some investors was dampened by the fact that the SPX had no days in which it fell by more than 2.5%, and demand for protective index puts among some investors apparently had plateaued for a while in the early months of 2013. (Still, it is worth noting that the volume for SPX puts still has been higher than for SPX calls, as many investors still are concerned about a possible repeat of the market drops of 1987 and 2008.) The relatively low levels of VIX helped stimulate strong demand for VIX calls and VIX futures this year; many investors like the idea of locking in a low level for a VIX product as a form of catastrophe protection. VIX options had record volume days on both March 19 (when VIX closed at 14.39) and on April 15 (VIX closed at 12.06 the previous business day and rose 5.01 points on April 15th). The fact that we have had low and rising interest rates has stimulated investors to look for yield in places beyond traditional corporate bonds and U.S. Treasuries; some pension funds and other investors are selling SPX call options in order to generate yield with the goal of superior risk-adjusted returns. As noted in a Barron’s column a month ago, the CBOE S&P 500 2% OTM BuyWrite Index (BXY) has generated higher returns and lower volatility than the S&P 500 over a recent two-decade time period.
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