How to Take Advantage of Unprecedented Options Volume

The S&P 500 tends to outperform after huge options volume spikes

Managing Editor
Nov 17, 2021 at 1:03 PM
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On Nov. 5, the Options Clearing Corporation (OCC) reported 57,094,802-contracts changing hands, marking the second-largest volume day in options trading history. Jan. 27 of this year holds the record with 60,041,659-contracts trading hands. You can explain away the January record levels; at the height of the Covid pandemic last winter, meme stocks and retail trading soared to unprecedented levels, and with it, so did an interest in options trading.

But it's not just the meme craze. Per the table below, the top 10 volume days of all time have all occurred this year, three happening in the last six months. It's emblematic that 11 months later, we're still experiencing record high options volume and indicates that this surge in options volume is pandemic-proof. What was once a niche in the investing world when Schaeffer's first started back in 1981, has transformed into an entire autonomous industry, with growth that appears sustainable.

Top 10 Volume COTW

You can attribute the catalysts for these surges in a variety of different ways. The aforementioned "meme stock" craze certainly explains away the early 2021 volume. The more isolated dates are likely more dependent on macro headlines or have no common correlation at all. But one common thread between these surges in options volume is that they offer bullish short-term returns for the S&P 500 Index (SPX).

SPX High Volume COTW

The table above, from Schaeffer's Senior Market Strategist Chris Prybal, looks at the SPX returns after high volume days compared to the anytime returns since 2020. On these 10 high-volume days, there tends to be an initial underperformance the few days after, but then outperformance five, 10, and 21 days later. The table below looks at the total volume of each specific return. Looking at June 18, the most recent return that can encompass all the data points, shows a 2.7% return one trading week later, and a 5.2% return 15 days later.

High Volume COTW

It's also telling what traders participating in these volume surges are doing. Below is a 5-day put/call volume ratio chart, which is approaching all-time lows and indicating a heavy call bias from options traders. You can roughly eyeball that those ratios were also at or near record low levels during the previous spikes in options volume noted above.

The surge in options volume is uniformly a good thing for investors. A rising tide lifts all boats, and in this case, that tide is inflows into options contracts. And while the historical returns offer a glimpse of short-term SPX promise, contrarians should tread lightly amid the overwhelming optimism expressed by options traders lately. Volume almost never equates to smart money.

5day pc ratio SPX

Subscribers to Chart of the Week received this commentary on Sunday, November 14.


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