Option Flow 2021 – Retail Rising
Henry Schwartz
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March 8, 2022
Listed option volume surged in 2021 to record levels as U.S. stock markets repeatedly touched all-time highs, with the S&P 500 Index finishing the year up 26.9% and Nasdaq Composite up 21.4%. Daily total option volume records were set 17 times during the year, including ten days over 50M contracts. Overall, 9.87 billion contracts traded over 252 sessions; 32% above the 2020 record 7.47 billion contracts and more than double the 2019 total 9.8 billion.
Across product types, Index and ETF options saw moderate growth of 10% and 6% respectively, while single stock options flow jumped more than 50%, building on the remarkable increase seen in 2020 when single stock option trading jumped 68%. Drivers for the surge include increasing adoption by retail traders on zero or low-commission brokerage accounts, low interest rates, extended work-from-home dynamics and increased media focus on meme stocks.
Notably, the 51% increase in single stock option volume greatly exceeds the volume increase in shares underlying those stocks for the year, which was approximately 5.2%. As a ratio of options notional shares to actual underlying shares, U.S. options flow increased from 23% to 33% as new participants entered and existing participants increased their levels of activity. This relative increase in option activity resulted in the notional dollar value of total shares underlying the options exceeding the actual share value transacted for the first time since options were listed.
Examination of activity by size that smaller executions continue to grow in frequency, with trades below 10 contracts approaching a high of 6 million contracts per day in November 2021, nearly double the level of small size activity executed prior to 2020. Large trades, 1000 contracts and up, saw relatively little growth over the year, suggesting large block trades may be executing in smaller lots or moving off-floor to trade over the counter, with dealers hedging algorithmically to minimize impact and visibility.
At the smallest possible trade size, 1 contract, total activity in 2021 exceeded 2020, with a recent share near 7% of the daily volume, or approximately 3 million contracts per day. Current levels of 1-lot flow are nearly 6x the average seen five years ago, and include a mix of retail, ‘pro-tail’, and institutional traders using algorithms to minimize market impact and optimize trading costs.
While single stock and ETF options receive much of the retail focus, a similar pattern in 1-lot trades in SPX Index options suggests growing use by retail and/or smaller accounts.
Data published by some brokers can be used to estimate options market share for a number of leading firms. Leading the list since mid-2020 is Robinhood with nearly 12% adv, or 4 to 5M contracts daily in 2021. Robinhood began offering no-commission options trading in Dec 2017, and recently reported a funded account base near 20M clients. We estimate approximately 1 to 2M of these accounts trade options.
A closer look at put and call volume over the past few years shows a heavy focus on call options as the S&P 500 has climbed nearly 47% from March 2020 lows. In 2021 the non-index put/call volume ratio dipped to historic lows near .55, or 9 calls for every 5 puts compared to an average close to 0.9 from 2010 thru 2019. By contrast, index products saw the ratio of puts to calls lift from approximately 1.2 to 1.5 over the same period, underscoring the disparate use cases of each product type.
Short-dated ‘weekly’ options have grown in popularity since they were first offered a decade ago and subsequently expanded to include most liquid products. For many of the most active symbols, such as AAPL and TSLA, weeklys often make up nearly 60% of daily volume. Market wide, contracts expiring within 5 days of trade date made up 46% of the flow, nearly double the market share seen in 2017.
Volume by duration shows a steady rise in market share of contracts expiring within ten days of execution, with total approaching 50% in late 2021, nearly double the level when weeklys were introduced.
In terms of market share, short-term contracts continue to see strong growth, with contracts expiring with one day making up 21% of the 2021 flow, compared with 16% in 2020.
Recent market dynamics appear to be having an impact in option pricing, particularly among ‘meme’ stocks popular with a segment of retail traders. Since the first quarter of 2020, the frequency of stocks with ‘inverted put/call skew,’ has increased by nearly 300%. This condition occurs when equilibrium prices of out-of-the-money call options are higher than similar OTM (out-the-money) put options, contrary to the typical volatility ‘smile’ or ‘skew’ in which puts trade at higher implied volatility levels to reflect expectations of downside risk exceeding that of similar upside moves.
One factor leading to greater option volume in 2021 is the dramatic increase in underlying issues with listed options, which had been declining in recent years with the number of publicly listed companies. After dipping to a multiyear low of 4270 symbols in 2020, a steady supply of newly listed underlying securities, including a surge in actively managed ETFs and SPACs (special purpose acquisition company), created more than 1000 new option listings in 2021, peaking at a record 5600 products available to traders by the end of the year. One consequence of the increase in listings, combined with weekly expirations and significant price volatility has been an unprecedented number of individual contracts listed, near 1.6M in November.
Data published by the Options Clearing Corp (OCC) identifies total option volume by account-type for all products, with total firm volume relatively stable near 5M contracts per day as customer and market-maker activity increased. Drivers for this shift include the business model of many retail brokers, which direct orders to market-makers for potential price improvement. In addition, the continued adoption of algorithms by institutional customers leads to lower levels of firm volume in the form of capital commitment, boosting market maker share.
Industry market structure was unchanged this year, with five exchange operators running a combined 16 exchanges, providing participants a choice of traditional, maker-taker, and alternate fee models as well a broad range of order types, complex order books, and other differentiators.
At the individual exchange level, market dynamics feature robust competition, with all 16 exchanges trading significant market share. The relative increase in multi-listed single stock and ETF option flow versus proprietary index activity is evident in the compressed share traded on the dominant index exchange, Cboe®. Typically, periods of higher volatility or market disruptions boost activity in ETF and Index products, which was seen in mid-December 2021, and January 2022 when Cboe Volatility Index® (VIX® Index) nearly doubled to the 30 range.
At the exchange operator level, market share increased for the smaller operators, BOX, MIAMI, and ICE, while the largest two operators, Cboe and Nasdaq, saw modest declines in market share over 2021.
Overall breadth of option trading increased in 2021 with 69% of the total volume trading in the top 100 listings, a change from 2020 when the top 100 was 73% of the flow and a significant widening from 2018 when 77% of the volume was top 100. The top 20 ‘hyperliquid’ symbols made up 42% of 2021 volume, compared to 47% in 2020.
Another measure of breadth involves examination of listings by average daily volume bracket. In early 2019, symbols trading fewer than 200 contracts per day made up nearly 65% of the listings, with untraded symbols amounting to nearly 8%. In early 2021, as single-stock option activity spiked in conjunction with a number of high-profile meme stocks, the share of 200 contract adv and below dropped as lows as 45%. By late 2021 these listings were nearly 60% of the total.
Complex orders, including spreads and trades tied to underlying hedges, remain a large part of the trading ecosystem, historically averaging near 70% of index and 30% of non-index volume. Complex share typically dips during periods of higher volatility when directional trades pick up compared to systematic strategies. Over the past two years the influx of newer participants appears to be further dampening complex share, with recent levels near 65% in indexes and 25% for ETF and single stock options.
Looking forward, many of the dynamics behind the 2021 option activity surge are likely to continue into the New Year, with January 2022 delivering two new daily volume records near 62M contracts, and daily average volume near 43.7M contracts, implying growth of 13%, to 11 billion contracts annually. As the US listed options markets approach their 50th birthday, recent activity shows that robust competition, unprecedented efficiency, and a diverse mix of participants are finding value in the offerings available. In addition, innovations such as the 1-multiplier Cboe Nanos index options, slated to launch in March, additional Tuesday/Thursday expirations, expanded trading hours for Cboe Index options, and other industry initiatives will continue to emerge, driven by market dynamics and meeting the needs of the financial community for years to come.
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