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December 1, 2011

Short and Sweet

Weekly Options Surge in Popularity

By By Peter Chapman

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Volume is up for the ninth straight year in the options industry, but there's a big difference this year. Of the 21.6 percent increase in total year-over-year volume through October, over a third of the growth is coming from contracts that expire weekly. That makes weeklies one of the most successful product launches in the industry's history. Since the creation of the listed marketplace in 1973, most options contracts have expired monthly.

"There's been a huge jump in volume since the product was launched nearly 18 months ago," Steve Crutchfield, chief executive of NYSE Amex Options, told Traders Magazine.

In the 10 months through October, weeklies accounted for 9.1 percent of total volume, according to data provided NYSE Euronext. That's up from 1.8 percent in the same period last year.

The final tally for the year is likely to be even higher, as a big chunk of the available classes only began trading on a weekly basis in September and October.

In September, total volume attributable to weeklies was 10.6 percent, according to NYSE Euronext. In October, that figure was 12.2 percent.

Weekly volume can be even higher in some of the individual classes. In Netflix options, in October, for instance, weeklies comprised about 40 percent of all contracts. Trading in weekly SPY options in October was 23 percent of the total, while trading in weekly options on Apple, Inc., was 27 percent.

(The percentages are of total industry volume. It is important to note however that weeklies only trade 40 weeks of the year. They do not trade during the third week of the month when the monthly contracts expire. Therefore, percentages would be higher if weeklies were only compared against total volume during the weeks in which they trade.)

Although the exchanges have had the authority to list weekly options since 2005, they only began in earnest in June 2010. From a handful of available classes then, the number of weeklies has jumped to about 100. The listings are typically of the more active names.

It has been the addition of new classes that is propelling the growth in trading, according to industry sources. "We opened up the floodgates," explained Paul Stephens, director of international and institutional marketing at Chicago Board Options Exchange.

That was especially true in recent months. According to the Options Clearing Corporation, 31 new names were added to the roster in September and October. Each exchange is limited by the Securities and Exchange Commission to 15 listings apiece, but once listed they are tradable by any exchange. A few of the nine options exchanges have decided not to exploit into their allotments.

The popularity of the product has exchanges chafing at the SEC's restrictions. Their brokerage customers are clamoring for new listings or complaining when one listing is dropped in favor of another. "We would like to expand the program," Stephens said. "There is certainly customer demand."

The CBOE was the driver behind the Short Term Option Series Program, as it is called, becoming the first and only exchange to list weekly options (on indexes) in 2005. The program stagnated, however, as the irregular symbols used to denote weeklies caused complications for brokerage back offices. "Firms' back offices were very much against weeklies," Stephens noted, "and some of their front offices as well."