In late August, Eurex introduced daily PM-settled options expiring each day for five consecutive days on the EURO STOXX 50® (SX5E). The product specifications are in the table below. In addition to offering five consecutive days of expirations, end-of-month PM settled options are now also available for trading.
A successful derivative market needs liquidity providers or what is commonly referred to as market makers. Market makers post prices where they are willing to buy or sell and also willing to negotiate a single price for a large trade. Usually, the bid and offer prices displayed on a screen represent markets posted by market makers. The liquidity behind the bids and offers is a function of the market’s overall ecosystem. Despite End of Day options being relatively new, they are very liquid due to the other established products offering exposure to SX5E, such as futures, longer-dated options, and even exchange-traded funds.
IMC Trading is one of the first market makers to post quotes on Eurex's End of Day options. They also have the distinction of having negotiated and executed the first block trade in the new End of Day SX5E option market just a couple of days after these short-dated options were introduced to the marketplace. With IMC instrumental in the successful launch of End of Day options at Eurex, we talked to Cathal Hardiman, Head of Direct Counterparty Trading in Europe for IMC.
Cathal, daily expirations have been available on a few other markets for a while now. What is IMC’s experience in trading short-term options?
Correct, daily expirations are new to EURO STOXX 50 (SX5E) but have been available in other products. SPX options have had an expiry listed every day since 2022, and AEX options have had dailies listed since 2008. At IMC, our systems are well-suited to pricing and trading short-term options. We’ve been market making dailies for over a decade and are one of the most active liquidity providers in these products globally.
What is different about market making daily options?
A key factor for market makers is how they can hedge their risk. The bigger the liquidity pool we can use to hedge our risk, the more active we can provide liquidity and the tighter we can quote. Hedging across products allows us to access a bigger liquidity pool and find the cheapest hedge. For daily options, the cross-hedging opportunities are fewer, so the more daily options available (provided they are liquid), the better for the whole short-term trading complex. As such, SX5E dailies (and later the DAX dailies) are a welcome addition to the dailies complex.
What are you hearing from the buy side concerning the introduction?
There’s a lot of interest in the product from volatility hedge funds, but whilst few got active right away, others are still in the pipeline for trading. Many of the hedge funds we trade with are actively trading SPX dailies already, so naturally, many are looking at rolling out similar strategies to SX5E, provided there is sufficient liquidity. That’s the first question everyone asks us: ‘How liquid is the product?’. Weekly options on SX5E are less liquid than monthlies, so the concern is understandable. The SX5E dailies are already being quoted on screen as tight as the regular weeklies, which is a big success for the product and helps to relieve liquidity concerns. For block trades, we’ll also price the daily roughly comparable to how we would price a weekly. However, it’s still early days; several firms are waiting until there is more of a sample size with sufficient liquidity before executing trading strategies in the SX5E dailies.
What uses are you seeing from the market?
So far, the main flow we see is from firms hedging risks on their structured product books, for example, bank Exotics desks. These teams often have one-day scenario risks they need to hedge, and dailies offer a more efficient way than weeklies. The new cash-close expiry for end-of-month options is also very beneficial for this structured product hedging flow since the expiries now line up, making the options a better hedging instrument. Another clear use case for dailies is for hedge funds looking to get exposure to a specific event or putting on a specific hedge for a certain event. Consequently, we have seen increased interest in the dailies around large macro events.
Why are you excited about the launch of Daily Options on Eurex?
By now, everyone is aware of the explosion of short-term volume in the US options market. Last month, SPX options hit a new record of 3 million contracts traded per day, with 1.4m of this in front dailies (aka 0DTEs). Retail interest is high in SPX 0DTEs, with retail volume making up nearly 40% of the total, nearly twice as high as the retail participation in SPX options as a whole. Closer to home, we see dailies working well on the AEX Index, making up over 20% of total volume and retail participation at similarly high levels to SPX dailies. The SX5E options market is by far the largest in Europe, nearly ten times bigger than the AEX options market in notional ADV terms. If we can get the dailies to 20% of SX5E volume without much cannibalization (or even dream of the SPX figure), then we have a very exciting prospect indeed. If this new product can boost retail interest in SX5E options, where retail participation has always been low with less than 5%, it would be another welcome boost to the European listed derivatives market.
How do you see this product type progressing on Eurex?
It is promising to see the early traction in EURO STOXX 50® Dailies (OEXP): after just one month, they are at 1.5% of total volume in SX5E options. Of course, the plan is that this continues to grow, and we are doing what we can to support this growth. Provided they continue to be quoted tight on screen, and the liquidity gets to similar levels as the existing OESX weeklies, more and more new participants will feel comfortable executing strategies in this new product. As they become more liquid, they can be traded alongside other daily options such as the AEX, the SPX and the DAX launching on November 13, creating a virtuous, much-needed circle of increased liquidity and flow in Europe.
Eurex will further expand its diversified equity index product suite with the introduction of Daily Options on DAX (ODAP) as of 13 November.
Building on the success of EURO STOXX 50® Daily Options: Get ready to explore the depths of daily trading opportunities in DAX® Index – covering Europe’s largest economy.
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