Alpha is tough to find and preserve in today’s low volatility environment.
That’s because the buyside must trade less liquid options and shorter expiration periods, such as weeklies, according to Tabb Group. These trading shortcuts must be used to generate alpha, Tabb said in a new report. And this is happening at the same time that the buyside faces increased competition from other institutional investors.
That’s the bottom line, according to Tabb’s 2013 report “US Options Trading 2013: Looking for the Edge.” Fifty two traders at asset management firms, hedge funds and prop trading shops were surveyed for the report. These institutions represented an aggregate of $6.8 trillion in assets under management.
For the report please click http://bit.ly/12FbPjy
“Range-bound volatility is creating challenging market conditions for options traders and forcing them to be more aggressive in their search for returns,” report author Andy Nybo wrote. “Traders are refining strategies by using options with more precise strike prices, looking for new opportunities and adjusting expectations to encompass a new environment with lower returns.”
One area of note was the increased usage of options with weekly expirations. Half of the traders surveyed told Tabb they use weeklies when they trade – up from just 11 percent last year. That’s a 78 percent gain year-over-year.
The buyside wants more volatility products, with hedge funds identifying volatility options and to a lesser extent volatility futures, as areas with potential for future growth. Asset managers are more sanguine on these products. Hedge funds also see slightly more opportunity in short-term options with weekly expirations. They fit with their more-aggressive trading strategies, although the popularity of weekly options continues to grow in strategies used by asset managers too.
The report noted options brokers are facing a challenging revenue landscape as commission rates for options trading continue to decline. Yet, it is not pressure from the buyside that is driving rates downward. Instead, it is competition for order flow among the crowded brokerage arena.
“Commission rates for electronic flow keep falling as brokers lower rates to attract flow from more active trading accounts that need little other than a fast pipe to exchanges. High touch trading desks are also facing competition, as agency brokers with lower cost structures offer lower commissions to get the trade done,” the report said.
