The Sky Isn't Falling in the Options Market

The Sky Isn't Falling in the Options Market
by Mark S. Longo 09/16/08

There has been a lot of hand wringing over the recent volume downturn in the options market. These concerns are understandable, if a bit overdone. After all, the growth rate has been incredibly strong in the world of options. So strong, in fact, that many people now take the repeated monthly volume records as articles of faith.

The volume downturn in August marked the end of an amazing 61-month streak of consecutive year-over-year volume increases. That is a record that few other sectors of the financial world can even begin to approach, let alone challenge. The mainstream penetration of equity and index options is truly unbelievable. For an industry that was facing a dire crisis just seven short years ago, this has been a remarkable resurgence.

Of course, as the growth spurt passed the 30- and 40-month mark, many observers began to wonder when the other shoe would drop. After all, common sense (and past experience) tells us that no market can maintain such a phenomenal growth rate for more than a few years. It was a trend that would eventually come to a dramatic, and possibly disastrous, end.

The Sky Isn't Falling

The other shoe finally dropped last month. Options volume in August totaled 263,405,886 contracts. That is certainly an impressive total, but it is far short of the record 294,211,443 contracts which changed hands in August 2007.

Has the bloom finally come off the options rose? Are we fated to see a profound retracement in options volume as institutional and retail customers abandon the options market en masse? Judging by the tremendous media coverage of the August volume decline, it would be hard for a casual options user not to feel concern over this development.