VIX (and Volume) Soars

January 24, 2006

Options post their largest one-day volume ever, and the ISE launches new options tied to the MSCI Japan and Dow Jones Real Estate indexes.

The options industry blew out all previous records for one-day volume on January 20, the options expiration day for January, as the options volume extravaganza continued its tremendous run. More than 14.9 million contracts changed hands on the 20th, according to the Optiosn Industry Council, beating the previous record by a stunning 29.

One of the reasons for the record results was the return of some volatility to the market. The CBOE Volatility Index (VIX), known as the market's "fear gauge," has surged more than 25 percent this year, after idling at multi-year lows during the 2005 holiday season. Volatility still remains well below its modern average, but continuing uncertainty in Iran, at the Federal Reserve and in the earnings reports of leading companies could quickly reverse that situation. Generally speaking, options volume rises with increasing volatility, as traders look to hedge big moves in the market.

There was certainly enough volume to drive trading at the International Securities Exchange (ISE), where a record 4.5 million contracts traded hands, a full 35 percent more than the previous record.  Average daily volume at the ISE is now 2.75 million contracts, up more than 250 percent from January 2003 levels of just 750,000 contracts.

The Chicago Board Options Exchange (CBOE) posted similarly robust results, with 5.3 million contracts trading hands, smashing the old record by 33 percent.  Index options led the way at the CBOE, with volume surging to nearly 2.4 million contracts.  The Boston Stock Exchange (BOX) also reported record volume.

ISE Hits Sweet Spot

To continue the record volume trends, exchanges are rolling out more and more products designed to appeal to nervous investors.  Case in point: The ISE rolled out options contracts on the iShares MSCI Japan and iShares Dow Jones U.S. Real Estate Index exchange-traded funds on January 23.   Needless to say, both Japan and housing are hot topics these days, and the two contracts could attract serious volume. 

 

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