In June, the Dow and S&P 500 had their worst days of the year, dropping over 2.5 percent after Fed Chairman Ben Bernanke hinted towards the possibility of a taper in its QE program. Just one month later, Bernanke’s reassuring words about the Fed’s stimulus sent the stock indices in the other direction toward all-time highs.
Match this with the market volatility that can come with earnings season and anticipation of a change in the federal funds rate, and you have an eventful year so far in equity markets.
Trading in our equity index options has reflected this. As of July 31, CME Group Equity Index Options tallied over 50 million traded contracts since the start of 2013. With that number up 58 percent from the same period last year, it mirrors growth within the extension and adoption of our new equity index offerings. We’ve witnessed volume increases both in the pits and electronically—as some of the larger contracts are still preferred to be traded on the floor.
With the addition of weekly and month-end equity index options, we’ve responded to demand for more precise and efficient hedging solutions that correspond to the consistent beat of economic events that can shift the direction of the market. In meeting this demand, we’ve expanded the total expiries to 59 from our traditional 12 monthly contracts.
Short-term expiries give market participants the ability to more effectively protect their exposure against potential market moving events. With a Fed minutes release, for example, you may not need protection against market moves for 30 days. But you may need it for five days. Or if you had a six-month position, there may be situations in between that you want to hedge. The adoption from users this year comes from these benefits.
To think about it a different way, if you could buy car collision insurance only for the weeks that you drove the car, would you do it? Of course, you would. Equity index participants now have the chance to do that with their exposure to the market, and they’re taking advantage. In each case the issue is one of timing and duration. You’re getting the protection you need when, and for how long you need it.
The demand for precise and effective risk management capabilities continues to grow, which is why index options providing more leverage and unique hedging strategies are gaining popularity in the futures market.