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The long and short of option trading

Chris McKhann (chris.mckhann@optionmonster.com)

From the very short to the very long, option traders appear to have an insatiable appetite for new ways to play the market. And now the market is giving us, well, more options.

Weekly options have been a big hit with traders, providing new and more frequent opportunities to get in and out of positions in their favorite stocks and funds. The growth has been dramatic as these shortest expirations now make up more than 12 percent of the overall option market.

The weeklies appeal a wide range of traders as they are using these options to make very short directional plays as well as take advantage of the increased time decay that comes in the last week of a contract's life.

Added to this, the International Securities Exchange has introduced $0.50 strike denominations to the weekly options of the 93 underlying assets that trade in $1 increments. It will be interesting to see whether the resulting tighter spreads will have any effect on volumes, as their appeal isn't clear. Certainly more strikes may be of use to spread traders, but only in structuring positions.

At the other end of the spectrum, the Chicago Board Options Exchange has proposed the creation of "super options" that would go out up to 15 years--into the realm of annuity companies and Warren Buffett.

The "Oracle of Omaha" is one of the largest option players out there, and his big bets on five major indexes was essentially the selling of 15-year puts in trades that had previously been done only over the counter. Now you too will be able to follow along on the listed market.

Option volume is on pace to be lower than 2011 totals, which would be its first no-growth year in some time. That is one of the primary forces behind the product innovation. 

Some the innovations have met with wild success. The CBOE Volatility Index is one such product. The VIX options--and now the VIX futures and some of the related exchange-traded funds--have been hugely popular and continue to grow rapidly. But not all new products have enjoyed the same reception.

The CBOE tried futures and options tied to Nasdaq 100 and Russell 2000 Indexes, but those failed. They have offered so-called variance futures for quite some time, but there is no volume there either. Unfortunately, that also appears to be the case with the new Emerging Markets Volatility Futures as well.

On the fund side, the VelocityShares Daily 2X VIX Short-Term Note (TVIX) has created a lot of headaches , as well as some lawsuits. The fund has seen record lows and may need to undergo a reverse split to stay afloat. In addition, UBS recently scrapped 12 of its volatility funds that failed to gain traction.

Much of the innovation is a good thing for retail traders, but successful products must fit both the mentality and strategy of the individual. Being able to trade more products more often doesn't mean that you should.

(A version of this article appeared in optionMONSTER's Education newsletter of Sept. 12.)

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