Analyzing the SPY's Recent Options Volume

Plus, some riskier call options

Senior Quantitative Analyst
Jun 2, 2022 at 8:00 AM
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There is an elevated amount of uncertainty in stocks right now. The SPDR S&P 500 ETF Trust (SPY), an exchanged-traded fund (ETF) that tracks the S&P 500 Index (SPX), recently closed with an 18% loss on the year; however, it bounced nearly 7% in a little over a week, leaving many investors wondering if it's heading back to new highs or just a bear market rally. This week I'm examining the SPY options markets. I'll be looking at the behavior of puts, which make money when the SPY goes down, compared to calls, which make money as the SPY goes up. In addition, I'll be looking at the characteristics of the volume now and how it compares to the past, especially since Covid-19. Hopefully, we will gain some insight into how investors are positioning themselves during this shaky market.

Put & Call Volume

This first chart simply shows the 20-day average option volumes for puts and calls. For SPY options, I tend to focus on put trades, as these tend to outpace calls and are frequently used to hedge large stock portfolios. Option volumes have increased significantly since Covid-19. The second chart shows the ratio of puts to calls. Another change since the pandemic is a general decrease in this ratio. In other words, call volume is up compared to put volume. Increased option volumes could be due to more hedging during these uncertain times or maybe the new money created for relief bills passed by Congress during the pandemic found its way into the markets. Another factor, which might account for the increased calls, is that retail traders have spent more time on personal computers allowing them to speculate in the options markets. I'm just hypothesizing here as I don't know the reason but there has been an increase in volumes since Covid-19.

20-Day cp volume

20-Day cp ratio

A Sea Change in Time Frames

The chart below shows the volume-weighted average number of calendar days before options expire. There has been a clear shortening of time frames when it comes to SPY option volumes. This has been a trend for a long time, but it has accelerated since the pandemic. It's true for both calls and puts. This could be another indication of money from non-professional investors. The proliferation of weekly options now available to trade also surely accounts for some of the decrease in timeframes. Before 2020, the typical timeframe for an option trade looks to be around 30 days. That timeframe is now just about two weeks. Days to Expiration

Riskier Calls

This final chart shows the volume-weighted delta of call and put volume on the SPY. The 20-day average was volatile, so I smoothed this one by using a 50-day average. The delta of an option is, theoretically, the probability of an option finishing in the money. Basically, the lower the delta, the riskier the option being purchased. Interestingly, the delta on put options has changed very little. It's been chopping around the 25% level for a few years. The typical call option delta, however, has fallen dramatically, especially as stocks have pulled back. The volume-weighted call delta has historically been higher than put deltas, but they are getting close to even. This is only speculation, but it could be another sign of retail traders. SPY puts are often used by portfolio managers and more sophisticated traders, and they may target a specific delta. Call volume, on the other hand, might be more influenced by the retail traders who target a specific price. As stocks fall and the implied volatility of options increases, traders must purchase more out of the money calls if they are targeting a specific price of option. Another theory is that traders are speculating on a snap-back rally and are comfortable buying riskier options.

50-Day Average Delta


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