Nov 11, 2015
Eurex
How much potential do Weekly Equity Options have? An assessment by Susquehanna’s Cathal Hardiman.
As turnover figures show equity options with weekly expiry are enjoying ever-increasing popularity. September saw highest monthly turnover ever with 76,000 contracts. And the annual turnover including September is already more than five times higher than the total turnover in 2014. Read why Cathal Hardiman from Susquehanna International Securities Limited, the first active Market Maker in our Weekly Equity Options, still sees considerable potential to be tapped.
Eurex: In the options space Susquehanna is one of the largest Market Makers in Europe. Can you please tell us what was the main driving force behind Susquehanna choosing to be the first Market Maker to support the newly launched Weekly Equity Options?
Cathal Hardiman: We have long been advocating increasing the range of underlyings that Weeklies are listed on, in response to increased activity on screen and increased interest directly from clients. There is no question that Weekly Options are in a major growth phase in Europe, and we are more than happy to help foster this growth by providing liquidity.
Moreover, although we are active across all asset classes, Susquehanna was founded as an options trading firm, and pricing options remains at the core of our business. We invest heavily in trader education and in technology, so when it comes to Market-Making less straightforward products like Weekly Options, we believe we are naturally better suited to the job than others.
Eurex: How does this new product suite complement your existing Market-Making activities on Eurex Exchange?
Cathal Hardiman: More options should lead to more volume as market participants can be more flexible in what strategies they employ.
As Market Makers, we offset risk across different products in order to charge less for taking on that risk. As such, we can hedge monthly exposure with Weeklies and vice-versa. So while the customer has more flexibility in what they trade, the Market Maker has more flexibility in how they hedge the risk, and can show tighter prices as a result.
Eurex: In the U.S., Weekly Equity Options on the most traded names count for around 20% percent of total equity options volume on average. Do you expect this to be replicated to the same degree in Europe?
Cathal Hardiman: Yes, the popularity of Weeklies in the U.S. is one of the reasons why we see Weeklies as an area with so much potential in Europe. Figures in Europe definitely look promising. In the EURO STOXX® and DAX®, where Weekly Options have been trading longest on Eurex Exchange, Weeklies make up ~7 percent of the total volume and this is growing year on year. Single Stock Weekly Options have significantly been expanded this year and growth takes time. Weeklies in EURO STOXX 50® were only 2 percent of total volume in 2012.
With a much wider range of names on which investors can trade Weeklies, we expect even higher growth rates going forward.
Eurex: Can you bring our readers up to speed on recent developments in the Weekly Options listed on Eurex Exchange? How are geopolitical events impacting this particular product type?
Cathal Hardiman: We have seen steady growth in weekly volumes this year, and in particular tend to see spikes in single stock weekly volumes for weeks that contain specific events such as earnings. For example, approximately 28,000 lots have been traded in UBSG VX weeklies since they were listed this year, with 24,000 of these in the Oct 30th Weekly which contains Q3 earnings.
For index options, we see spikes in weekly volumes around large events such as ECB meetings. The two Weeklies around January’s QE ECB meeting traded 1.3m lots in total. This is over 10 percent of total EURO STOXX® weekly lots traded for the entire year.
Eurex: Please describe some popular strategies that involve Weekly Equity Options.
Cathal Hardiman: One key motive for trading Weeklies is that they give the investor specific exposure to an event (e.g. earnings). For example, buying a weekly straddle the week of earnings will be cheaper than buying the monthly straddle, as you are buying exposure to earnings week without buying the other 3 weeks of the month as well.
For any given week, you can compare the weekly ATM straddle to how much you expect stock to move this week. If you think stock will move more than the straddle, then you can buy weekly straddles, and vice-versa.
Some investors who use options to hedge the downside risk on their portfolio employ Weekly Options for more targeted hedging. Rather than consistently being long downside puts, they will simply buy weekly puts coming in to any large events (e.g. economic releases, earnings). This gives them reduced protection on their portfolio, but does so at a much lower cost.
Eurex: In which Weekly Options do you observe the highest interest and what are the reasons for that?
Cathal Hardiman: Naturally we tend to see more interest in the most liquid names (SX5E & DAX in indexes - DBK GY, DAI GY, NESN VX in equities). It stands to reason that high activity in the weeklies follows high activity in the monthlies, as people switch monthly strategies to weekly strategies, and use Weeklies to supplement other strategies.
Eurex: In your opinion, what will drive future growth in our Weekly Options contracts?
Cathal Hardiman: The most important driver of growth in any of these new products is liquidity. Investors need to see consistent prices on screen and know that they can get size done around these levels. Having Susquehanna on board as a designated Market Maker ensures that screens are reliable and investors have deep liquid markets to trade. It is worth keeping in mind that if a client comes to our sales desk directly we can generally show more liquidity than what we publish to screens.
Eurex: Thank you very much for sharing this with us, Mr. Hardiman.
About Cathal Hardiman
After receiving his MSc. in Finance from LSE, Cathal went through the education program at SIG. He spent nearly three years on the trading side before joining the European options sales operation. In this role, Cathal makes prices for asset managers, hedge funds and private banks across the spectrum of European equity and index options. He is currently based in the SIG European headquarters in Dublin, Ireland.
