February is known as the month of love – the month in which Valentine’s Day takes place. Options traders certainly got a lot of love last week, when the stock market saw its biggest crash since 2008.
Cboe has been seeing far more interest and volume than average for VIX futures since January of this year, especially for contracts expiring around the Iowa caucus and Super Tuesday (the day when the greatest number of U.S. states hold primary elections and caucuses for the presidential election in November), and of course, around the November election itself. The October and November activity is somewhat typical for an election year, but as Cboe President Ed Tilly said at the exchange’s annual press lunch in January, the demand for hedging and hedging vehicles expiring around the Iowa caucus and Super Tuesday has been “unprecedented.”
Over the past few weeks leading up to Super Tuesday, Bernie Sanders has been surging in polls across the country. The success of the Democratic senator from Vermont, whose platform has largely revolved around – among other things – increasing taxes for corporations and billionaires, as well as reforming (and probably tightening) regulations on banks and large financial institutions, has many in the markets concerned. This prompted higher-than-average hedging activity to protect against the risk of the market reacting negatively to the results of the Super Tuesday elections and caucuses. Before Sanders, it was the strong polling numbers of Elizabeth Warren, who has been running on a similar platform to Sanders, that had the markets worried.
In addition to the election, an even bigger concern is occupying the markets’ attention. Cboe tweeted a poll on March 3rd asking what its followers thought was the biggest risk currently facing the markets; 30 percent of respondents said the U.S. election was the biggest risk, while 58 percent said the coronavirus was a bigger threat than the election.
Conferences in pretty much every industry are being cancelled due to the virus. The FIA posted a notice on Friday asking that attendees from China, Japan, South Korea, Iran and Italy stay home rather than risk infecting attendees in Boca. This week, the FIA announced that it was cancelling FIA Boca 2020 due to coronavirus concerns – an unprecedented move. A lot of business gets done at conferences like Boca; shutting down events like it means a lot of important conversations either won’t happen or will be delayed. Then there’s all the money that will be lost on cancelled flights and hotels.
Because the world economy is heavily dependent on the economic power of China, and because the Chinese province of Wuhan is the epicenter of the outbreak, the virus has effectively slowed everything down just enough to cause catastrophic interference in shipping schedules, air mobility, and general business operations the world over. Last week, the markets tanked, causing selloffs not seen since 2008.
Cboe saw incredibly high upticks in average daily volume (ADV) in February (64 percent higher than February 2019), which included the highest trading volume for its Weekly VIX Futures in nearly three years during the last week of the month. VIX Weekly Futures have shorter expiration periods, making them useful for quick, precise hedging against short-term risks. This year, it just so happened that many VIX Futures, including a ton of Weeklys, expired right after Super Tuesday.
Last week, the CME Group also reported an all-time high monthly average daily volume of 30.1 million in February; 6.1 million of those were options contracts, which was reportedly a 73 percent increase from February 2019 volumes. The MIAX PEARL Options Exchange also saw record-smashing volume for their contract execution records, executing an historic 1.9 million contracts, and then executing 2.3 million contracts the next day.
On the clearing side, the OCC also set a new record for cleared volume of options contracts last week – 42.2 million. Two days later, they broke that record by clearing over 45 million in one day – then broke that record the next day by clearing nearly 49 million. The original record was set in August 2011 with 41.9 million contracts cleared. In fact, in February 2020 the OCC cleared 568,899,108 contracts in total – the highest ever for the U.S. equity options industry. According to the OCC, 43 percent of that total volume happened in the last six trading days of the month, right around when the crash took place.
Given the fairly strong performance of the markets through February it was probable that some kind of correction was likely sooner or later, even if the correction we got was especially harsh. There are other factors, of course, that contributed to it; numerous warning signs of an imminent recession – such as the reports of a severe manufacturing slowdown last year – have been showing up since last October. Fortune ran a poll in January of this year in which 58 percent of respondents said they believe a recession is imminent in 2020, a concern that hasn’t exactly been assuaged by the coronavirus epidemic. The Fed’s interest rates have been getting lower and lower, slashing rates by an additional half of a percentage point this week. Plus, expected global GDP growth is slowing and has been for some time, the trade war with China is ongoing…the list goes on.
Over the past couple of weeks, there have been a lot of deep gasps in the markets for good and bad reasons – mostly bad. As usual, the ones who noticed the writing on the wall – and/or got really lucky – were the ones who profited the most. Even though some had a tough week, everyone’s still standing – wins and losses, big and small, happen if you’re in the markets long enough. The important thing is to stay in the game.
Photo courtesy of Cboe Global Markets.