US Listed Options Fall to 1.01B Contracts in Q2

The second quarter of 2016 wasnt as kind to the options market with volume dropping .32 percent versus the first quarter, thanks to the Brexit effect.

According to TABB Groups US Options Market Review: Q2-2016, which examined the latest trends in the US-listed options markets, report author and analyst Callie Bost, noted listed US options volume climbed in June to its highest levels in 10 months after a stock market swoon on the heels of the United Kingdoms decision to leave the European Union. Volume in Q2 hit 1.01 billion contracts, a 3.2% drop from Q1 2016s volume, but a 4.6% increase over Q2 2015s totals.

Thank Brexit for Q2 2016s year-over-year pickup in options volume.

In June, listed options volume climbed to its highest levels in 10 months after a stock market swoon that erased more than 5% from the S&P 500 Index (S&P 500) on the heels of the United Kingdoms decision to leave the European Union.

US stocks had a relatively calm quarter until June 24, the day after the Brexit vote when results were released, Bost noted. The S&P 500 dropped 5.3% in two days, while the CBOE VIX Index (VIX) climbed to a four-month high. While stocks Brexit selloff was quick, the subsequent recovery was even quicker.

The VIX dropped 39% (or 10.1 points) in five days, as the S&P 500 regained all of its losses and ended up closing higher for the month of June, albeit less than 0.1% higher.

TABB noted that the surge in Junes option volume was propped up by a rush into broad-market index products. Index and exchange-traded fund (ETF) options comprised 57% of total volume in June, the highest concentration for the two groups since 2012. As geopolitical events and monetary policy developments continue to rattle markets, traders are increasingly gravitating toward options on indices and ETFs for portfolio protection.

Volatility-based options were especially popular during the first half of the year amid elevated volatility in January and February and the VIXs Brexit-induced spike and retraction. VIX options volume grew the most out of the top-traded symbols, posting 35% more volume in H1 2016 than in the same period last year. Volume in VIX options totaled 15.9 million contracts in June, 21% higher than volume in the year-ago June.

Volume in volatility-linked weekly options has also flourished this year as traders try to capture quick moves in the VIX, similar to what happened during the Brexit market event. Short-term options on the ProShares Ultra VIX Short-Term Futures ETF (UVXY), which holds front-month VIX futures, soared 196% in H1 2016 compared to the same period last year. Weekly options volume on the iPath S&P 500 VIX Short-Term Futures exchange-traded note (VXX), which is also tied to the performance of short-term VIX futures, surged 34% in H1 2016 over the first half of last year.

Bost wrote in her report that the volatility in June prompted market makers to pull back their risk exposure, with the average bid/ask spread widening to 38 cents, the widest since June 2015. Despite the surge in June, average bid/ask spreads in Q2 2016 were generally unchanged from the prior quarter, averaging 35 cents in Q2.