Thirty-five years ago, Cboe revolutionized the financial world with the introduction of options on broad-based stock indexes. On July 1, 1983, Cboe launched S&P 500® (SPX) index options with posted volume of 350 contracts. This year the average daily volume for S&P 500 options is around 1.4 million contracts, as many individual and institutional investors now use the contracts for purposes such as portfolio management, hedging, and income generation.
Below are eight charts that related to the growth in use of and interest in S&P 500 options.
CHART #1 – GROWTH IN AVERAGE DAILY VOLUME SINCE 1983
Average daily volume for the SPX options grew from 111 contracts in its launch year of 1983, to 24,525 contacts in 1987 (in 1987 the average daily volume for the S&P 100 (OEX) options at Cboe peaked at 447,237 contracts). Average daily volume for the SPX options grew from 92,421 in 2000 to 1.44 million in the first half of 2018, as more fund managers now use SPX options for portfolio management (see also Chart #7 below).
CHART #2 – CAPACITY AND GROWTH IN NOTIONAL VALUE OF DAILY VOLUME
When institutional investors are considering risk management tools, a key issue often raised often concerns market capacity - does the market have the capacity to handle large-sized trades? One metric that can be helpful in answering this question is the notional value of average daily volume. As shown in chart #2 below, estimates for the notional value of daily volume for Cboe’s S&P 500 options have grown from $12 billion in 2002 to $390 billion in the first half of 2018. A number of developments facilitated the growth in chart #2, including the introduction of Cboe’s BXM, BXMD, and PUT benchmark indexes, papers by Ibbotson Associates, Wilshire, Callan, Blackrock, and Keith Black and Professor Ed Szado, and the launches of SPXW weekly options with expirations on Mondays, Wednesdays and Fridays.
CHART #3 – GROWTH FOR S&P 500 OPTIONS EXPIRING ON MONDAYS, WEDNESDAYS & FRIDAYS
Prior to 2005 the primary standard S&P 500 options offered by Cboe were the SPX options with Friday A.M.-settlement, but since 2005 Cboe had successfully launched SPXW Weekly options with P.M.–settlements on Mondays, Wednesdays, Fridays and at ends-of-months. Chart #3 shows that average daily volume grew from 145,852 in 2003 to 1.44 million in the first half of 2018, and that most of the S&P 500 options volume this year has been in the SPXW weekly options.
CHART #4 – SKEW CHART WITH MORE THAN 30 EXPIRATION DATES FOR S&P 500 OPTIONS
The skew chart below for the S&P 500 options shows that there are more than 30 expirations (see legend on left side) and dozens of strike prices available, and that the estimated implied volatilities range from around 9 for at-the-money options to more than 90 for some of the deep-out-of-the-money put options than can be used to provide protection from a black swan event.
CHART #5 – GROWTH IN OPEN INTEREST FOR S&P 500 OPTIONS
Many institutional investors prefer to see strong open interest figures for options contracts, and the year-end open interest for S&P 500 options rose from 1.37 million in 2000 to more than 14.4 million in 2018.
CHART #6 – TEN BIGGEST DAYS FOR S&P 500 OPTIONS VOLUME
Chart #6 shows the ten dates with the biggest volume for the S&P 500 options. Five of the dates occurred in the first half of 2018. On many of the dates, there was anxiety or volatility in worldwide financial markets, and portfolio managers worked to adjust their equity exposures.
CHART #7 – GROWTH IN ASSETS FOR ’40 ACT FUNDS THAT USE OPTIONS
A 2018 study by Keith Black and Professor Ed Szado found that the number of ’40 Act funds (including mutual funds, closed-end funds and ETFs) that focused on use of options grew from ten funds in 2000 to 157 funds in 2017. Key findings of the study include:
- Less volatility for options-based funds: As a group, the options-based funds had less volatility and less severe drawdowns than the stock and commodity indexes studied.
- Better risk-adjusted returns: Cboe’s BXM, PUT and BXMD Indexes all had higher risk-adjusted returns (as measured by the Sharpe Ratio and Sortino Ratio) than the S&P 500 and S&P GSCI Indexes.
CHART #8 – GROWTH IN BXMD BENCHMARK INDEX THAT WRITES SPX OPTIONS
Since 2002 has been a pioneer and leader on the topic of benchmark indexes for options-related strategies, and Cboe offers ten benchmark indexes that now have 32 years of price data history since mid-1986. The Cboe S&P 500 30-Delta BuyWrite Index (BXMD) had higher returns and lower volatility than the S&P 500, MSCI EAFE and S&P GSCI Indexes.
To learn more about ways in which S&P 500 options can be used in portfolio management, please visit these links –