Short-term options (STOs) are arguably one of the most successful product innovations launched by exchanges in recent years, with growing investor interest a big factor behind their success.
Although technically not all that new — the Chicago Board Options Exchange has offered weekly options on a few of its proprietary index products since 2005 — over the past year they have become a substantial part of the market, accounting for as much as 25 percent of total volume on any given day.
STOs were a significant factor behind record options volume in 2011, especially as rising volatility in the latter half of the year attracted the attention of investors seeking to hedge exposure and those making directional plays using low premium options instead of much higher priced underlying equities. STOs volume totaled an estimated 378.9 million contracts in 2011, accounting for 8.3 percent of total volume.
Growing Investor Appeal
Short term options appeal to a variety of trading strategies and end-users, especially investors seeking to manage short term exposures through hedging or directional strategies. As would be expected, the low price and shorter expirations provide considerable appeal for speculation but they also represent a valuable tool to manage risk and enhance income. TABB Group believes that the majority of STOs volume currently originates from retail trading accounts but institutional investors are quickly embracing the products for risk management, premium generating strategies and, of course, as a way to speculate on short-term market movements.