The Options Clearing Corporation [OCC] reports that overall options volumes slowed in 2012 and broke a streak of nine consecutive years of record-setting activity. A little more than 4 billion contracts were cleared last year, but that was an 11% drop from the 4.6 billion record volume set in 2011. The decline comes despite a winning year for the equity market. The S&P 500 gained 13.4% in 2012. We've also seen a recent drop in open interest in some of the popular indexes and exchange-traded products. Are the slowing volumes and declining open interest signs that the industry is heading on an ominous path?
Not only are volumes slowing a bit, there's been a notable recent decline in open interest in some of the more actively traded options products today. For instance, open interest in the S&P 500 Index (.SPX) options, the world's most actively traded index contract, is currently about 9 million contracts and near the lower end of the 52-week range. OI in SPX options fell to a low of 863K on December 24. In addition, since the January term (expiring in two weeks) has 2.6 million in open interest, once those contracts expire, SPX open interest is likely to fall to new 52-week lows. Low open interest is a trend seen many popular index and ETF products, including the SPDR 500 Trust (SPY), iShares Small Cap Fund (IWM), and PowerShares QQQ (QQQ).
Whether the recent decline in open interest is part of a longer-term trend or simply a short-term development is difficult to tell, but it has important implications for investors because it affects liquidity. Open interest represents the number of contracts in an individual option that have been opened and not yet closed out through an offsetting trade. Contracts with large amounts of open interest tend to see higher trading volumes, especially around the expirations. Higher volumes means more bids and offers.
Yet, while there has been a recent decline in open interest in some of the more popular products and volumes slipped a bit in 2012, the US-listed options market remains a vibrant marketplace where some of the world's brightest investors look for opportunities to make profits and hedge positions. 2012 was only the second year that volumes topped 4 billion contracts and represents substantial growth from 2001 when less than 800,000 contracts changed hands. In today's options world, much of the trading is electronic and only two actual trading pits - CBOE Volatility Index (VIX) and SPX - remain on the CBOE today. Options trading is efficient, transparent, and, as the world's largest derivatives clearing organization, the OCC promotes the industry's growth and financial stability. The outlook has never been better heading into 2013.
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