In my experience option traders fall into one of two distinct camps: single stocks and index/ETFs. Despite similar contract specifications and pricing models, the mindset required to trade each product type is notably different. Single stock traders have earnings releases, takeovers, and other company-specific events to worry about, while index traders tend to pay close attention to macroeconomic headlines and global equity and volatility movements. On average in our markets about 50% of the volume trades in single stocks, with the balance trading among index and ETF products. It is important to note the high dollar level of the SP500 (SPX) contract gives a big lead to the index camp in notional terms, but in simple contract volume the average breakdown is very close to 50/50. In times of turmoil this balance tips to reflect an urgent flight to portfolio hedges- with the most recent period of extreme market turmoil in late August providing a good example; as CBOE VIX® lifted above 50 we saw option volume spike to nearly 40M contracts on August 21st and the portion of that volume which was index and ETF spent several days near 60%- only recently sliding back to the 50/50 ratio. Quants will point out that in a crash scenario correlations jump so high that ETFs and index products are perfectly good hedges for nearly any stock, while I would add that reduced liquidity in single stocks and their options is another reason volume shifts to a handful of the most active products.
Fortunately market volatility has come back to earth just in time for the 3nd quarter earnings cycle and the focus has returned to single stocks, with a number of well-followed names reporting this week and the pace of results picking up into the end of the month.
Among the top 100 single stock options by volume, traders are looking forward to numbers from Intel (INTC) and Netflix (NFLX) in the next few days week, as well as large-cap financials Wells Fargo (WFC), Citibank (C), and Bank of America (BAC). Single stock traders pay a great deal of attention to the near-term straddles that expire just after earnings to indicate market expectations in terms of magnitude, with a special interest when prices suggest an extraordinary gap move once data is released. Tuesday’s data highlights several standout names to watch include Netflix (NFLX) with a straddle suggesting a gap well beyond the median 17% seen over the past eight quarters, as well as AMD implying roughly 16% and Pandora (P) where the options suggest a move in line with last quarter’s 15%. Later in the month the pace picks up, with Amazon (AMZN), Google (GOOGL), and Microsoft (MSFT) reporting during the week of October 19th, followed by Apple, Ford and Twitter the final week of October.
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Writer may have holdings in securities discussed.