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When August options expire this Friday, we'll be saying goodbye to a near-record amount of open interest. What's curious is that so far the September and October series, traditionally two of the most volatile months, have drawn relatively little interest.

Depending on where you sit in the investment industry, this can be viewed as bad for business, or a sign that fall will be rife with opportunities.

The narrow trading range and accompanying decline in volatility have pushed option traders to the sidelines. "People loaded the boat in July and August, those assets wasted away, and now it's become a waiting game," said Gary Saklov, strategy director at M&W Asset Management, a New York-based investment firm. The July series was dominated with speculative call-buying, Saklov said, as investors "hoped that strong Q2 earnings would extend the spring rally to new highs." At the same time, residual fear regarding market risk had people buying a record amount of puts in the August contracts, especially in index-related products, to protect gains.

"Most of these options did or will expire worthless, and while their purchase may have initially seemed to be a conservative strategy, the ultimate cost was a big drag on performance," Saklov said. He thinks people are now playing a game of chicken with the calendar.

The consensus seems to be that there is little need or impetus to buy protection over the next three weeks. "We've passed through the danger zone, we are in the middle of the

trading range, and no one wants to throw out money on a decaying asset," adds Nancy Nevans, vice president of derivative trading for Collins Securities.

Look at the

Nasdaq 100 Trust


as an example. With the QQQs currently trading at $31, the Sept. 31 put is trading at $1.05. In just 12 trading days from now the option's theoretical value will be cut in half. Assuming everything remains constant, including implied volatility, which at 29% is historically low, the option will be priced at just 63 cents on Sept. 2, the day after Labor Day.

But the contraction in volatilities has put off premium selling. "With 'vols' at these low levels, the risk/reward of heading into the fall naked just can't be justified," said Gary Golden, a broker with Raymond James. Golden thinks that once August open interest is removed, a lot of the hedging pressure will leave the market and we'll see a "very active and volatile trade this fall." It seems the big bet is that nothing happens over the next two weeks and traders just sit on their hands waiting. Currently, the prospects of owning a decaying option or exposing yourself to unlimited risk are equally unappealing.

Exchanges Trading Places

For the sixth consecutive month, the International Securities Exchange traded more equity options than any other option exchange, garnering a 31% market share in July. "The real growth in options trading is in institutions who are finding that electronic trading offers great economies," said Steven Sears, ISE's director of special projects. He sees index and exchange-traded fund products continuing to become an increasing share of option volume.

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The one obstacle to complete domination is the refusal of the Chicago Board of Option Exchange to give up its monopoly on the popular

S&P 500

Index (SPX) options. The ISE recently filed a petition with the

Securities and Exchange Commission

and the Commodity Futures Trading Commission claiming the CBOE's refusal to link or dual list the contract is in violation of competitive practice rules. The ISE seems to have a legitimate complaint given that the SPX options have some of the widest bid/ask spreads of any market.

The CBOE is definitely feeling the pressure to retain not only its one-time dominance but its relevance in the options industry. It recently spent about $60 million upgrading its software to bridge the old specialist/market maker system with true electronic trading. Just last week, in an attempt to expand its product offerings and create a "one-stop options shop," the CBOE resubmitted an application with the Commodity Futures Trading Commission to trade options on existing indexes and futures contracts. The problem is that most of the futures contracts are traded and controlled by the

Chicago Mercantile Exchange


, which recently went public and has little incentive to license away its most popular products to a rival exchange. In fact, the CME has submitted its own proposal for expanding option offerings.

Against this backdrop is the recent sale of the American Stock Exchange to the private firm of GTRC for a bargain price of just $110 million. Many people expect GTRC to sell the back-office technology systems, which are valued around $60 million, and eventually, if trading volumes are stable, merge with another exchange within the next three to five years.

Also looming on the horizon is the expected October launch of the Boston Option Exchange, another all-electronic exchange. "We welcome competition because it ultimately will serve the customer and we are confident that the ISE, given a level playing field, will provide the best markets and service," Sears said.

Enjoy these last few weeks of summer because the fall season looks full of drama.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to

Steve Smith.