Is the Index Option Market Creating Volatility?

By D. David Jilek, CAIA®

Highlights

  • D. David Jilek, Chief Investment Strategist at Gateway Investment Advisers, points out that trading volume in S&P 500® Index option contracts set a record in October 2022 – its sixth new record in as many months.
  • After reaching a pandemic-era low in August 2020, the growth trend in monthly trading volume has turned exponential, with a variety of factors driving this change.
  • Growing demand for volatility-reducing strategies can be linked to the end of Federal Reserve’s quantitative easing and a move away from fixed income for risk reduction, due to rising rates.
  • But there is another, newer phenomenon spurring this growth trend – ultra-short-term S&P 500® Index option trading – specifically, options that have one day or less until they expire.
  • As much as half of October’s record volume may have been due to these “zero days to expiration” strategies.

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