• CME Group has recently seen growing interest in shorter-dated options trading,  particularly  in maturities with less than one week until expiration.
  • The addition of new weekly options has provided market participants expanded capability to grow their trading using these options closer to expiry; material ADV growth has resulted.
  • Traders have harnessed newfound risk management and view expression potential, leveraging the unique “Greek” profile of these near-maturity options.
  • Customers can execute a variety of option strategies on-screen, ranging from directionally focused “outright” option trades to complex, multi-leg strategies available on the CME Globex platform. 
  • Index choice matters when managing portfolio risk. Operational and capital efficiencies across multiple indices are available, benefitting options traders regardless of risk tolerance, maturity focus, or account size.  

The increased interest in managing rapidly evolving risks has transformed options markets, providing greater trading opportunities and risk management needs for participants looking to manage near-term exposures. Short-Dated options at CME Group are a flexible alternative to trades executed over-the-counter (OTC), and are particularly useful when trading key economic and market events.

With the launch of Tuesday and Thursday E-mini S&P 500 options on futures in April 2022, the marketplace for options on futures continued an evolution that has been in place for several years. As this trend towards near-term risk management has unfolded, many market participants have concentrated focus on maturities within zero to five days. In fact, a notable percentage of the trading community is particularly concerned with same-day expiry risk as macroeconomic and geopolitical risks change rapidly. 

CME Group Equity Index options on futures volume has recently grown dramatically, particularly amongst maturities between zero and five days until expiration. For reference, two years ago, zero to five DTE (days to expiration) E-mini S&P 500 option expirations saw ADV (average daily volume) of 350K. This zero to five DTE volume number grew to nearly 650K contracts in 2022, an 85% increase. 

Stepping back, one can see a similar pattern over recent history when reviewing all maturity types across E-mini S&P 500 options. Evaluating trends over the previous five years, it becomes apparent how the marketplace focus has shifted to managing near term hazards as the ZIRP (zero interest rate policy) era moves further into the rear-view mirror for investors. Inflation and rising interest rates are having a profound impact on investor risk appetite and risk management needs.

Clearly, Short-Dated option trading has grown considerably, both in absolute and percentage terms.  But when one considers that as recently as 2019, overall E-mini S&P 500 option volume was under 600K across all maturity types, this growth is even more notable. In comparison, 2023 YTD ADV has grown to over 1.2M option contracts traded daily, over 100% growth during this period. Near-term focused option trading activity has been beneficial to the growth of liquidity and depth across the options on index futures complex at CME Group. The newfound choice of expiration types allows new risk management capability for a variety of trading strategies, which has grown the overall trading ecosystem.

Trading “Greeks” with Short-Dated options

Option traders are very familiar with the effects of option “Greeks” on the performance of their option strategy. Delta, Vega, Gamma, Theta, and Rho change due to a number of factors, such as market movement, volatility shifts, the passage of time, and changes in interest rate assumptions (interest rate risk had been an afterthought for over a decade since the Great Financial Crisis). While assumptions relating to these parameters affect any option, effects are particularly acute with respect to options with a shorter time to expiry. For instance, Gamma exposures require much more active management as an option nears its expiration.

Market participants  realize the importance of attention to managing these risks, especially in an environment with considerable uncertainty surrounding inflation and interest rates. The variety of maturities available at CME Group allows traders maximum flexibility in managing these risks, benefitting from capital efficiencies and a robust liquidity ecosystem.

Strategy flexibility

While many option traders are very directionally focused, trading “outright” options to express a view near option expiration, market participants have also benefitted from CME Group’s robust ecosystem for option spreads. Traders have the ability to execute multi-leg strategies to fine-tune Greek exposures as they rapidly change near expiry with the customization afforded by the CME Globex platform. Traders can employ vanilla strategies, such as vertical spreads, straddles or strangles in portfolios, or can RFQ (Request for Quote) the broader market anonymously to create more complex/custom (including delta-hedged) trading strategies to manage dynamic risks, spanning up to 40 legs.

CME Group customers have access to trading these complex strategies in a CLOB (central limit order book) unique to the individual strategy, ensuring that customers never face “leg risk,” or the risk that one leg of their strategy is unfilled, which could present market risk. Below is an example of an RFQ for a call spread in CME Direct, with a CLOB for the strategy.  

Index choice matters

Index choice truly matters when it comes to diversified portfolio construction, and CME Group’s offering provides options traders with a variety of tools to facilitate the investment process. In light of successes in the Short-Dated option offering across E-mini S&P 500 options during the spring of 2022, CME Group recently further expanded listing cycles across additional flagship indices.

E-mini Nasdaq-100 Tuesday and Thursday options on futures were listed in October 2022, with E-mini Russell 2000 Tuesday and Thursday options following in February 2023. With these changes, expiries are available spanning the upcoming 10 business days at all times for E-mini option varieties of Russell 2000 and Nasdaq-100 Indices. E-mini S&P 500 options on futures expiries are available every business day spanning the upcoming five weeks.

E-mini Nasdaq-100 options will likely remain an area of interest for tech-focused investors, as large mega-cap technology giants face unique challenges related to rapidly rising interest rates. At the same time, Nasdaq-100 investors have been less susceptible to financial and energy industry dynamics during recent turmoil in those sectors.

Conversely, E-mini Russell 2000 options will be watched closely by those with a small-cap and value-focus. Those looking to trade a view with reduced index exposure to U.S. dollar fluctuations will benefit from Russell 2000 Index constituents whose revenue streams are more domestically sourced.   

Complementing E-mini options growth trends, Micro E-mini options now join their larger-sized counterparts in offering options expiring every day of the week. These accessibly sized versatile contracts on benchmark indices are 1/10 the size of the traditional E-mini Index options. They provide a precision tool for traders looking to trade market-leading indices at an accessible notional size.

Over 7.5M Micro E-mini options have traded since inception, and with the newfound capability to hedge fine-tuned exposures using Micro E-mini options every day of the week, smaller traders now have the same trading flexibility and precision capability as those trading E-mini option products.

In summary, CME Group Equity Index options provide participants flexibility in executing strategies over varying time horizons. Market events will always create the need to manage risk, and the index and maturity choice available at  CME Group provides investors with the tools needed to hedge exposures as they arise.

For a full list of CME Group’s Equity Index options product offering, visit cmegroup.com/equityoptions

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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