Although I've never watched the show "Gossip Girls," my impression is that it deals with troublesome situations that arise from modern life. I thought it might be time to discuss a couple of instances of options-related gossip or chatter I'm picking up. Some of the topics being discussed may have already resulted in some troublesome situations.
I'm hearing from several quarters that institutional traders have stepped back from the options market. On October 6, Jane Fox reviewed a Marketwatch article that reported on the phenomenon, but retail traders had picked up on it before the Marketwatch article. In several trading circles, options traders were reporting difficulty getting fills and noting that open interest in back-month options was lower than expected. Tom Sosnoff of Think-or-swim noted the same phenomenon in a talk to students in the Sheridan Mentoring program just a few days before the Marketwatch article appeared. In addition, the Options Industry Council (OIC) noted that September's total options contracts decreased 4.05 percent from the year-ago level. Equity options volume dropped 4.82 percent. Average daily trading volume also decreased. Year-to-date volume remained higher than the year-ago period.
A scan of headlines from recent months' OIC articles reveals that August's total option trading volume fell 1 percent, and July's, 9 percent. Volume decreased 2.03 percent in June. So, if volume has been decreasing for months, how is the year-to-date volume up? One word: May. May, with its flash crash, set all kinds of records. It produced the highest volume day ever and the highest monthly volume on record. Those weren't records we'd like to repeat when we realize what was happening.
What's up with the decreasing options volume for several months in a row? Some might be attributed to expected lower volume for summer months, but remember that those drops were from year-ago levels so were comparing apples to apples or summer months to summer months. What I do know is that lower volume impacts options traders, especially those trading iron condors. Previous to the last few months, I was typically able to get a RUT iron condor order filled fairly close to the mid-price level, and, if I was a little patient, I could do so with the SPX iron condors, too. I haven't traded the RUT lately, but I can tell you that SPX fills that once might have taken me minutes to a few hours now require days of patiently waiting and some caving in away from the mid-price. RUT traders are reporting similar results. This requires traders to be particularly careful when they're entering a trade to get as good a fill as possible. This is especially true with the volatility indices running as low as they have been. These circumstances create situations when you may have difficulty getting enough premium to justify the risk you're taking.
Troublesome fills when you're getting into a trade are bad enough: they're downright dangerous when you need to adjust or exit. You may find that you have even more need to consider buying protective long put or call positions rather than trading your spreads when they need adjusting. You may not be able to get those spread orders filled when you need to do so.
I suspect that if the markets level out long enough and we get some of the market uncertainties behind us, options traders, including institutional ones, may step back into the market with more regularity. I hope so. Be wary for now, however. If you can't get a good fill in a timely manner when trying to open a trade, reassess whether you really need to trade that vehicle at that time.
Another bit of gossip may have a happier result. On October 5, CHICAGOBUSINESS reported that the CBOE will soon launch a second exchange "targeted at high-frequency traders." The launch is scheduled for sometime between October 15 and November 1. SPX traders will be glad to know that SPX options will be rolled out on this exchange beginning in the first quarter. I have mixed opinions about this, although most will greet it as unqualified good news. I had just entered a 60-contract SPX iron condor the day before the flash crash. I heard all kinds of horror stories from those trading RUT options. However, I was able to close out my SPX bull put spreads for an amount that my long experience taught me was a reasonable one. I didn't like paying it, but I did like the fact that I was able to get a fill in a timely manner at that price. I did hear stories about market makers just walking away, but I appreciate the fact that there were at least enough to provide an orderly market.
Yet, the CHICAGOBUSINESS article claimed that volume could "double or even triple" on SPX options with the addition of electronic trading. That can't help but be good even if I wonder about the orderliness of the market on times such as that we saw last May. If you'd like to get the information straight from the horse's mouth, here's the CBOE's press release.
Lots more gossip is circulating, especially with speculation about new taxes on traders and new regulations and rules, but it's difficult to pin down what's just gossip and what might be in the works. Maybe we'll have another gossip day when we know more.