Exactly two years ago the Chicago Board Options Exchange (CBOE) launched a new index options product that matched the market-leading S&P500 (SPX) option specs except for two important factors: 1. End-of-day (PM) expiration and 2. Electronic listing on the C2 electronic exchange (owned and operated by CBOE). The listing was moved from C2 to the CBOE’s hybrid electronic system earlier this year.
Some in the industry saw the launch as a response to industry pressure for multi-listing of the SPX, which is one of the last pit-traded single-listed products. SPX has been the dominant index product for nearly two decades (after OEX faded out in the 90s) and sees about 800,000 contracts of daily volume- which is even more impressive when you consider the index level of 1693- converted to SPY options this would be 8 million contracts- fully half the market-wide daily option volume. Tight markets and very deep liquidity keep SPX the choice of institutional hedgers and portfolio managers- with nearly $2billion of premium trading on a typical day.
SPXPM had a slow start- in part because the screen-displayed liquidity paled in comparison to the pit-quoted markets, and in part because many big-bank SPX traders like the high-touch pit-traded model where massive blocks can be executed cleanly by highly skilled floor-brokers – some of whom have held their 18 inch by 18inch floor spots for decades (I’m talking about you Sammy, Ronnie, Marno and Joe!)
Average daily volume in SPXPM over the past two years has been about 6000 contracts per day- just under 1% of the SPX flow, and many SPX traders haven’t paid much attention to the product. Open interest has seen better growth, in part because of ‘flex’ contracts rolling into the SPXPM when listed-contract specs match the pre-existing flex contracts.
After a slow start, CBOE officials may have received a birthday present this week; a record-breaking SPXPM spread trade totaling 52,000 contracts traded to double the outstanding put open interest and possibly ‘break the ice’ for institutional acceptance of SPXPM. After ‘shopping’ the spread around the SPX pit first around noon eastern time, a trader paid 95cents to $1 for a total of 26,000 SPXPM Oct 1500-1550 put spreads to open a massive position that may hedge more than 4billion dollars of notional value.
The trade may have been tied to a delta hedge of nearly $100million worth of SPY or SP500 futures – and similar flow hit the tape in SPDR S&P 500 ETF (SPY) options on the AMEX at the same time (a buyer of 16K Oct 150-155 put spreads for 9.5cents), suggesting the initiator may have been putting on a complicated trade than the simple vertical spread and OCC clearing data confirms a firm (rather than customer) account was the source of the trade, suggesting there is likely more to the story than a simple vertical put spread. Midday quotes on Thursday show this spread quoted near $1.25, for a gain near $650K or 25%, but the bigger story here is how the trade marks the first ‘mega’ institutional block to be executed in the product. While SPX and SPY liquidity has been very strong for many years, yesterday’s activity appears to position SPXPM as a valid option or the institutional flow, which is likely to attract further liquidity and accelerate the cycle that could bring SPXPM into the top tier with SPX and CBOE Volatility Index (VIX) as hedging vehicles for the largest market participants.
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By Henry Schwartz