Last weekend we discussed the staggering sizes hit in the options markets in recent days, which culminated with an absolutely blockbuster $904 billion in total option notional volumes on Friday, Nov 5 when countless momentum stocks went haywire trading purely on gamma flows and technicals, and prices terminally disconnected from fundamentals. But it was Goldman flow trader Scott Rubner who put it best, saying that "in the last two weeks, option trading in the USA has never been greater! After following the retail trading community for the last 18 years, I could never imagine typing these large numbers."
Summarizing Rubner's findings, this is the punchline behind the staggering numbers: single stock option notional (140%) now exceeds single stock shares notional, 72% of options traded have an expiry of two-weeks or less (think 2-3-4 days), and activity on the message boards is as high as it has been all year.
And staggering they are: the following bullets summarize daily single stock option notional traded in the last two-weeks:
Mon 25-Oct $657bn – TSLA day = +12.66%. This was the retail yolo inflection.
Tue 26-Oct $680bn - This is largest single stock option notional traded on a Tuesday.
Wed 27-Oct $694bn - This is largest single stock option notional traded on a Wednesday.
Thu 28-Oct $711bn
Fri 29-Oct $894bn - This is largest single stock option notional traded on a Friday.
Mon 01-Nov $664bn - This is largest single stock option notional traded on a Monday.
Tue 02-Nov $582bn
Wed 03-Nov $655bn – In terms of # of contracts, Wednesday saw the 7th largest number of calls (31.60M) traded in history, going back to 1992. This is where things became broad based.
Thur 04-Nov $904bn - This is largest single stock option notional traded of all time. Yesterday saw the 3rd largest number of calls (32.78M) traded (exceeding January 28/29th). This was not even an expiry today. I expect volumes massive today. What was special about Thursday, a non-expiry day? Nothing. There will be massive volume going through at the close today.
Today, Goldman's derivatives guru, Rocky Fishman, did an in-depth analysis on the recent record option volumes in the form of a Q&A which assesses the impact of these growing volumes, which culminated with a record $2.6 trillion notional in options traded on Nov 5....
.... and makes the following findings:
Option volumes have surged. Index option volumes jumped in late September (peak: $1.8tln on 20-Sep), and the more recent surge in single stock volumes (peak: $945bln on Friday 5-Nov) have left overall option volumes near record levels. The single stock volume has been concentrated in a small number of large-cap growth stocks and in very short-dated maturities.
Individual investors continue to be more than half of option volume. Q3 payment for order flow disclosures show that as was the case earlier this year, around 55% of option contract volume is traded by retail brokers. Recent rising option volume is likely corresponding to rising individual investor activity.
High option activity is contributing to rising volatility, low skew, low correlation. Market responses to recent volume are consistent with short-dated call buying dominating recent flow. Implied volatility has been high in the context of an SPX that hit another all-time high last week. Skew has flattened - even beyond single stocks and into index markets (especially NDX and Russell 2000). Large option positions also lead to non-fundamental share trading flows,reducing stock-pair realized correlation.
Excerpting further from the full Q&A report, here are some of the most relevant (rhetorical) questions and corresponding answers:
Is elevated options volume concentrated in a few stocks (TSLA, AMZN) and sectors (Tech, Consumer Discretionary, Communication Services) and, therefore, not important to the S&P 500 as a whole?
Option volume is indeed concentrated, but in areas of the market that are important to the SPX as a whole. Tesla and Amazon occupy a unique space in option markets, because they are large stocks with higher options-market turnover (option volume divided by shares outstanding) than any other very large stocks. When single stock option markets set volume records last Thursday and Friday (4-5 Nov), Tesla and Amazon represented more than half of all notional volume traded on each day.
Other large cap growth stocks also trade high option volumes. Over the past two weeks, 87% of notional option volume has been in four areas of the market: the Technology sector (most active underlyings AAPL, NVDA, MSFT, AMD), the Media & Entertainment (GOOGL, FB, NFLX) industry group of the Communication Services sector, and the Retail (AMZN) and Automobiles (TSLA) industry groups of the Consumer Discretionary sector.
That said, the Technology sector and the three industry groups mentioned above add up to 48% of the weight of the S&P 500, so in Goldman's view the concentrated single stock option volumes are meaningful to the overall flow dynamics of the index. Surprisingly, if for no other reason than option-driven flows, the sectors mentioned above only trade slightly more volume in shares markets than other sectors do, suggesting that the tail increasingly wags the dog when it comes to markets.
How does single stock option volume compare with its peak days in January 2021?
Single stock option volumes have been higher in recent weeks than they were around January’s short squeeze. Notional single stock volumes crossed $900bln on Thursday and Friday last week - well above the $565bln peak on 29-Jan, even if adjusted for the rising equity market level. Friday’s $945bln notional, (1.8% of the Russell 3000’s market cap) set a one-day record for single stock option volume, both in notional terms and as a percentage of the index market cap.
Is retail investors’ role in option trading even more significant than it was in early 2021?
Retail brokers’ recently-released Q3 payment for order flow disclosures shows little change of retail option activity earlier this year: retail brokers’ reported option volume continues to be around 55% of all listed option volume (measured in contracts). Over the past three weeks, option volumes have risen, and based on the stability of the retail participation rate, Goldman infers that retail is likely again the majority of contracts traded and therefore trading a larger-than-ever volume of single stock options.
Are recent option volumes actually growing or do they just look bigger because the equity market is higher?
When the equity market is growing and hitting all-time highs, market size metrics (volumes, index levels) tend to hit all-time highs as well. To better capture the potential impact of option markets on equity markets as a whole, Goldman tracks the size of the option market as a percentage of the size of the equity market in addition to monitoring it in dollar terms. Even by that conservative metric, we are still seeing option market growth, especially in single stocks. On Friday (5-Nov), equity option markets traded 5% of the Russell 3000’s market cap in options notional, second-highest ever, and 1.5% of the index’s market cap that trades in single stock options daily is triple the 2019 average.
How does the size of the single stock option market compare with the size of the index option market?
The index option market continues to be larger than the single stock market, although the gap has been shrinking. Index/ETF notional volumes peaked at $1.8tln in September, compared with single stock volumes’ all-time high of $945bln last Friday. Over the past three months, index and ETF options have averaged $1.1 tln notional/day and single stock options have averaged $510bln notional/day.
Are option trading volumes now bigger than delta-one shares trading volumes?
For the single stock market in the aggregate, yes, but for most individual stocks, no. Listed notional option volumes have been 150% of share-trading volumes in November, after hitting a record 140% in October. However, among US stocks with $100bln+ market caps, only TSLA, AMZN, and AMD trade more than 5% of their share count in options on a daily basis; for comparison most stocks average below 1% of their share count in daily share trading. The combination of a high market cap and extraordinary option activity (18% options turnover) make TSLA a critical driver of this analysis. Excluding TSLA and AMZN, notional option volumes have been 80% of shares volumes in November. Option-driven flows are likely an important reason why TSLA has higher share turnover than most other large stocks.
How much of the recent high option volumes are in short-dated tenors? Have longer-dated option volumes also been growing?
Volume has been increasingly short-dated, but longer-dated single stock volumes have grown as well. Single stock options have expirations every Friday, in recent weeks more than half of notional volume has consistently been in the “front” Friday (see Exhibit 21). Nevertheless, longer-dated single stock volume is sizable: an average of more than $50bln notional/day has been trading in single stock options beyond the Jan-2022 expiration. Much of the short-dated volume is opening and closing the same options in the same day: volumes in short-dated maturities have been several times the daily changes in open interest, and often one-day volumes have been higher than total open interest. SPX index options have expirations listed every Monday, Wednesday, and Friday, leaving the under-24 hours segment as the fastest-growing area of index volumes.
Why are volumes higher on Fridays than on other days of the week?
Single stocks with active option markets have expirations every Friday, and on those Fridays investors with expiring in-the-money options often choose to sell their options (potentially rolling forward a week) instead of taking physical settlement (which can be cash-intensive). As a result, Fridays are usually the highest-volume days of the week for single stock options.
Has single stock option activity impacted index volatility surfaces?
Single stock option markets have been dominated by short-dated call buying, and as a result have left demand for upside vega that extends beyond the single stock option market into index markets. Index vol risk premium has expanded since its October low. The NDX has a high concentration of stocks with large option volumes, and correspondingly its now-much-lower put vs. call skew stands apart from just about any other major index. (Interestingly, the Russell 2000 has even lower low skew following recent strong performance). Over the past three weeks’ surge in single stock option volume, SPX skew has also fallen - reflecting implied correlation potentially approaching a lower bound (see Exhibit 19 below). Further demand for single stock upside exposure has the potential for a heightened impact on SPX implied volatility given already-low implied correlation levels.
How has single stock option activity impacted the attractiveness of dispersion strategies?
Growing demand for single stock options, especially single stock calls, has pushed implied correlation levels substantially lower. Implied correlation calculated from one-month 25-delta call prices is just 16% - lower than just about any time outside of 2017 in recent years. The potential for large option positions to lead to large non-fundamental, gamma-driven price moves remains (and is one reason for the persistently-low Growth-Value correlation over the past year), so for the near term Goldman expects continued low correlation between stocks with high option activity and the rest of the market. At current implied correlation levels, though, this is a weak entry point for dispersion strategies.