By Suzanne Cosgrove

In times of market turmoil, options volume flourishes. That truism certainly proved itself in August as a record number of options traded and the VIX index spiked to nearly 50 amid market fallout over Standard & Poor’s downgrade of U.S. long-term debt.

“The change in volatility, and the degree of change, is what creates (options) trading opportunities,” said Andy Nybo, a TABB Group principal and head of its derivatives research department. “It’s the intra-day changes that fuel that kind of options trading, he added.

August options volume surpassed half a billion contracts, a record for monthly volume.  Options Industry Council data show 550 million options contracts changed hands in August, a 94 percent increase over the same period a year ago, when 283 million contracts were traded.

At the same time, the Chicago Board Options Exchange Market Volatility Index (VIX) hit a closing high of 48 percent on Aug. 8 as stocks plunged the Monday after S&P’s rating action. The next day, Aug. 9, the VIX closed at 35.06 percent, but remained volatile for most of the month, breaching the 40 level eight more time during subsequent sessions of during the month.

Volatility remained firm, holding above 30 for the remainder of August and into September, as worries over the resolution of the U.S. budget deficit debate and the European Union’s debt crisis continued to keep equity traders and investors on their toes.

Equity options volume represented 501.9 million contracts of the total traded in August, compared with 262.2 million at the same time a year ago, OIC data show. Equity options averaged daily volume of 21,823,814 contracts, up 83.09 percent compared to 11,919,732 contracts for the same month last year.

Historically, options use increases when market volatility is up, said Jim Binder, a spokesman for the OIC, an industry cooperative funded by a number of options exchanges, including the Boston Options Exchange, Chicago Board Options Exchange, C2, International Securities Exchange, NASDAQ OMX PHLX, NASDAQ Options Market and NYSE Amex Options.

“Has volatility increased over the past six weeks? Yes, absolutely,” said Nybo. “Will it continue? We cannot predict.”

New Options Players Added to the Mix

But the growth in equity options volume is related to rising demand from institutions such as hedge funds and asset managers, as well as to greater  trading opportunities provided by a more volatile market, said Nybo.
 
The OIC does not provide data on the amount of trading by institutions vs. retail, but Binder agreed that while there are “definitely more retail investors out there,” institutional use of options is growing.

It appeared in August that that institutions “got a better sense of how to use options to hedge their portfolios,” Binder said.  “Certainly we are seeing options becoming a more mainstream investment vehicle.”