They're Falling Asleep In The Options PitsDavid Greising
The equity options business is stuck in a rut. Despite record stock prices and booming trading volume, the action in the nation's stock options exchanges has dropped dramatically in recent months, exacerbating a malaise that has endured since the 1987 stock market crash. Average daily trading volume in the Standard & Poor's 100-stock index, the most widely traded stock-index option, has averaged only 228,384 contracts since May, down from 272,121 last year and 48% below 1987's precrash levels.
The slump has prompted not only cost-cutting at the options marts but intense debate over what's wrong with the business. The chief reason is a decline in the stock market's volatility, on which options depend. The Dow Jones industrial average surged last winter but has traded in a 200-point band since early this year (chart).
TIMID TIMES? Such a narrow range deals the options business a double whammy. Speculators have little incentive to buy options, since there's less chance of a big hit. And those who use options to hedge their holdings no longer bother to do so. Monthly trading volume has gone from 18.4 million contracts in February to 14.6 million in August.
Volatility waxes and wanes, of course. But there are more systemic threats to the options business. Those looking for a low-priced shot at a big win have alternatives. Over-the-counter stocks, where the NASDAQ 100 average has risen 38% this year, have drawn interest, as has the burgeoning market for initial public offerings.
Some even argue that in the risk-averse `90s, options have lost their allure compared to long-term investments. "Options by their nature just don't fit," says Fidelity Investments Vice-President Michael J. Hines.
John Casario, an accountant in Thornwood, N. Y., is an options trader who has cut back sharply. He used to trade 50 contracts as many as 20 timesa month. But lately, he has been buying zero-coupon Treasury securities and trimming the size of his options trades. "If I've got 40 contracts, and there's only 50 contracts trading in a day, Iget very disturbed," Casario says. And Thomas A. Bond, a floor trader atthe Chicago Board Options Exchange, no longer swaps IBM options in 50-contract batches. "Today, if you're a 50-lot buyer, that's pretty big," Bond says.Folks like Casario and Bond have forced the exchanges to downsize. The CBOE's average daily trading volume has shrunk to 360,000 contracts, well below the breakeven level of 435,000. On Sept. 3, the exchange laid off 75 employees as part of a move to reduce its staff by 8%. At the American Stock Exchange, the No. 2 options mart, there's a hiring and salary freeze. Seat prices on the major options exchanges are down by an average of 23% so far this year.
To stir up activity, the exchanges are reaching out. In an unprecedented cooperative effort, a joint delegation of chief executives from the CBOE, the Amex, the Philadelphia Stock Exchange, and the Pacific Stock Exchange has called on leaders of several top brokerage firms. Their pitch: Push options more, and we'll serve you better. And they've tried to convince firms that options, although they produce lower commissions per trade than stocks, can still be lucrative because of a high turnover rate.
NO HELP. The firms, however, complain that there are just too many options, which drives up their costs. For years, the exchanges kept expanding the number of stock options even though few attracted much trading. Multiple listings of options on more than one exchange added to the problem. Now, the Securities & Exchange Commission is changing rules to make it easier to offer options on even smaller companies, which may make things worse.
The exchanges are responding to the firms' beefs. The CBOE and the Amex have delisted 22 low-volume options. On Sept. 4, the CBOE reduced a proposed list of new options from 33 to 21. Meanwhile, in an effort to find successful new products, the exchanges have introduced long-term options and option-like warrants, vehicles with life spans measured in years rather than months.
Still, on the CBOE's trading floor, gallows humor prevails. Trader Gary Lahey holds a chart of the Dow out at arm's length and grimaces. "Look at this thing. How are you going to tell somebody to buy options when you don't believe it yourself?" Lahey says, scowling. "When the coup started, we were shouting: `Shoot Gorbachev!' Anything to get this market moving." So far, at least, the exchanges are resorting to less drastic measures.