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February 1, 2005

Volume Is Up, Up, and Away

By Mark Longo

The most remarkable development in the options business over the past five years - more remarkable than the bitter battles - has been the robust growth.

This has occurred despite slowdowns in the economy and downturns in the stock market [see chart]. "I think that forebodes tremendous growth ahead," says Bill Brodsky, chairman and CEO of the Chicago Board Options Exchange (CBOE). "We have tremendous under capacity in the U.S. industry, whereas in the past we might not have said that. The industry did more than a billion equity options contracts in 2004, and it's only going to get bigger." Overall options volume in the U.S. last year was about 1.2 billion contracts.

The exchanges are now handling record volume that would have been unthinkable only a few years ago. Much of this volume is fueled by new products. One popular example is the CBOE's VIX future. This product allows professionals to trade the front month volatility of the S&P 500 Index, an invaluable tool for hedging portfolios. The launch of options on the SPDR ETF was a signal event for the industry. Until SPDR, traders looking to hedge their portfolios with S&P options had only two choices - the cumbersome S&P 500 futures options at the MERC, or the complex S&P 500 cash options at the CBOE. However, the addition of the SPDR options has opened up a host of possibilities for equity traders who want cheap and easy ways to hedge portfolios.

The successful launch of SPDR on multiple exchanges is a sign that index options, once the exclusive realm of hedge fund managers and wealthy private investors, may now be a tool for the broad investing public.