Articles

More Options With More Options
By Chintan Kotecha, Nitin Saksena, Youssef Brahimi and Benjamin Bowler

Related ETFs: TLT / HYG / IWM / QQQ / TBT

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The remaining equity ETF options outside the top three also represent a diverse array of investments. Liquid ETF options exist within the following categories:

International equities: MSCI EEM and EAFE, Brazil, China and Mexico
U.S. large- and midcap stocks: Dow Jones Industrial Average and S&P 400 MidCap
U.S. sectors: S&P 500 stocks categorized by their GICS² sectors and broader-sector access to real estate, retail, oil, gold stocks, biotech and home builders
U.S. equity volatility: Options on VXX, the short-term VIX futures ETN
Levered and inverse products: On a selection of broad-based U.S. equities, U.S. sectors and international equities. Notably, options on levered and inverse products have outsized volume versus open interest relative to other liquid ETF options. The interpretation is that options on these funds are likely used more for intraday speculation.

Dominated by GLD, commodity ETF options trade $3 billion notional/day: Commodity ETF options are the second-most-liquid asset class of ETF options traded, and are dominated by GLD, (gold), which trades approximately $2.4 billion in notional per day (Figure 5). The remaining notional of commodity ETF options is traded primarily through NYSE Arca: SLV (silver), NYSE Arca: USO (oil), NYSE Arca: UNG (natural gas) and NYSE Arca: AGQ (two-times levered silver). Options on commodity ETFs are relatively new and have picked up volume only in the last four years.

Macroeconomic factors help explain the demand for options on precious metals and energy. Gold and silver become more valuable when default risks to global central banks’ balance sheets increase. And, recurring tensions in oil-producing countries bring volatility to energy prices. ETF options on these commodities allow investors the opportunity to hedge and/or speculate on these volatile markets.

Options on fixed-income ETFs showing most consistent growth: The options market for fixed-income ETFs is dominated by contracts on the 20+ Year Treasury Bonds (NYSE Arca: TLT) and UltraShort 20+ Year Treasury (NYSE Arca: TBT) ETFs, which currently account for $654 million notional per day. Both TLT and TBT are linked to long-dated U.S. Treasury bonds. Another $18 million notional per day is being traded in options on the iBoxx $ High Yield Corporate Bond ETF (NYSE Arca: HYG).

Options on these fixed-income ETFs have been growing more consistently than ETF options across other assets (Figure 6). While volumes for equity, commodity and currency ETF options are 50-60 percent off their peaks, volumes on fixed-income ETF options are less than 5 percent off theirs.