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U.S. Options Trading Volume Rose 33% in November

Dec. 1 (Bloomberg) -- U.S. options trading rose 33 percent in November from a year earlier, the biggest gain since December, as investors turning to the market amid wider stock swings drove volume toward an eighth straight annual record.

“Funds are increasingly using options as investment committees have become better informed and more comfortable with using the strategies,” Andy Nybo, head of derivatives at research firm Tabb Group LLC in New York, said in a telephone interview. “They’re more educated with using derivatives for risk management purposes and that’s where the future growth in the options market will originate.”

Volume on the nine exchanges jumped to 352 million contracts in November, up from 265 million a year earlier, according to the Chicago-based Options Clearing Corp., which settles all trading of exchange-listed contracts. This year’s volume through November was 3.56 billion, nearing last year’s 3.62 billion total, OCC data show. Nybo estimates that 2010 volume will rise to 3.8 billion.

Mutual funds, hedge funds and other institutional investors are increasingly relying on options to protect stocks and bet on market swings. The benchmark index for U.S. stock options prices rose 11 percent last month to 23.54 as of yesterday, the highest close in two months. The VIX, as the Chicago Board Options Exchange Volatility Index is known, measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index.

Two-Month High

Options give the right, without the obligation, to buy or sell a security at a certain price by a given date.

The benchmark index for U.S. stock options prices rose 11 percent last month to 23.54, the highest level in two months. The VIX, as the Chicago Board Options Exchange Volatility Index is known, measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index.

The Chicago Board Options Exchange, owned by CBOE Holdings Inc., was the largest venue last month with 26.3 percent of volume. Nasdaq OMX PHLX was the second-largest and the biggest venue for options on stocks and exchange-traded funds, followed by CBOE. Nasdaq OMX Group Inc., based in New York, also runs another, smaller options exchange.

ISE, NYSE

The International Securities Exchange is the third-largest in both categories, while NYSE Euronext’s two options markets combined made it the second-largest exchange operator in equity derivatives excluding indexes. NYSE Euronext runs NYSE Amex and NYSE Arca, which use different trading rules to attract clients to those venues.

C2 Options Exchange, which began trading in October and is run by CBOE, had 0.33 percent of overall volume. C2, which is a fully electronic market, is the ninth options exchange. CBOE plans to trade options on the S&P 500, which are listed exclusively on its bigger market, on C2 starting next year.

“Exchanges tend to beat each other up, they tend to compete on fees and usually customers benefit,” Jonathan Werts, a managing director at Bank of America Corp. in New York, said at a conference in Chicago last month. “Do we need nine exchanges? No. Is it unhealthy? No.” Venues that don’t provide benefits to investors won’t be used, he said.

To contact the reporters on this story: Jeff Kearns in New York at jkearns3@bloomberg.net; Nina Mehta in New York at nmehta24@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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