Volatility at the end of Q3 was nearly 50% higher than at the beginning, and options skew also steadily rose throughout the quarter. Skew is the difference in the implied volatility for out-of-the-money (OTM), in-the-money (ITM), and at-the-money (ATM) options. Skew generally exists in most stocks with OTM puts typically trading at a higher implied volatility than OTM calls.
As a measure of skew, we looked at the average trade price of 5% out-of-the-money (OTM) puts with maturity between 25 and 35 days as compared to the average trade price of 5% OTM calls. Without skew, we would see the near-term 5% OTM call price equal the near-term 5% OTM put price. In SPY, the premium at which the puts traded over the calls (“risk reversal” or “collar”) increased by about 74% from its low for the year in April to its high year-to-date in September. Skew has been at its highest since February of this year implying an increased risk of a market drawdown.
SPY 5% OTM Put vs Call Differential
With both volatility and put skew elevated, there was increased usage of SPY options. SPY options volume concentration rose from multi-year lows to around 17% of U.S. options volume in the first few days of October.
Looking at single stock options volumes by sector, Information Technology (IT) and Consumer Discretionary each made up about a quarter of single stock options volume. Longer duration growth and widely held tech symbols in both the IT (AAPL, AMD, NVDA) and Consumer Discretionary (TSLA, AMZN, BABA, NIO) sectors have been reactive to the 10-year Treasury yield for several months, which spiked recently. Both of these sectors experienced an increase in their share of market activity Quarter-over-Quarter (QoQ). The Health Care sector also increased QoQ with the steady flow of news related to the Delta variant, vaccines, and treatments. The Energy sector spiked in September as well, perhaps due to energy shortages. Most other sectors experienced a decrease in their share of market volume.
Option Volume Share by Sector
As a result of the negative market catalysts previously mentioned, Put-Call ratios increased in many sectors, reflecting these macro themes. For example, Put-Call ratios in Industrials and Materials may have risen due to perceived risk surrounding the size of a potential Infrastructure bill as well as the risk of whether Congress would be able to pass any such bill at all. Real Estate also experienced a noticeable spike in Put-Call ratios, perhaps over fears of a real estate bubble or risk of market contagion due to Chinese real estate developer Evergrande and its debt crisis. An exception to the trend of rising Put-Call ratios is the Energy sector, which has appreciated during the quarter (and the Put-Call ratio has declined).
Put-Call Ratio by Sector
The market has been turbulent to start Q4, but options market activity continues to grow, suggesting that investors increasingly look to the listed options market to hedge risks related to such volatility and to express macroeconomic and stock-specific expectations. Liquidity and displayed interest are key to executing in this higher volatility environment. During this volatile time, NYSE Arca Options has continued to increase its market share and be a leader in time quoting at the NBBO. We look forward to building upon NYSE Arca Options’ continued momentum.
Increased retail activity in the equities market has affected which stocks are trading the most, and when and where those stocks trade. We’ve previously highlighted retail’s impact on pre- and post-market volume and the opening auction, and now focus on the period immediately after the opening auction. Market participants often avoid this time of day due to higher volatility, an approach worth re-evaluating given current trends.
As the home of ETFs, the NYSE continuously works to strengthen market quality and provide the optimal trading environment for listing and trading ETFs. In April 2021, in service of this goal, the NYSE introduced new requirements and incentives for its industry-leading NYSE ETF Liquidity Program, including the assignment of additional market makers ("Less Active ETF Leads") for new and/or low-volume ETFs.
Options Market Bracing for Turbulence »
U.S. options market volumes remained strong in Q3 2021 with an average of 35.5M contracts traded per day in the midst of several negative market catalysts: inflation fears, Fed taper plans and a rising 10-year Treasury yield, the Delta variant, Evergrande debt woes, US Federal debt limit brinksmanship, and uncertainty around an infrastructure bill.