Did the Trend Toward Short-Dated Options Extend Across Regions?
Short-dated index and equity options have lately dominated option volumes on U.S. exchanges, as detailed in our recent blog post. We can see a similar increase in trading for options linked to the MSCI EAFE and MSCI Emerging Markets (EM) Indexes, but there are notable differences. The shift toward shorter maturities was most prominent in the U.S. and EAFE, while for EM options, volume was relatively stable.
In previous research, we looked at systematic options-overlay strategies, such as buy-write, put-write and put-protection strategies linked to the MSCI EAFE and MSCI EM Indexes that rely on the use of one-month options. The increasing shift to short-dated options may indicate a growing number of investors using these types of strategies in their investment process. To provide more insight, we show call and put volumes separately in the exhibit below.
Volumes for options linked to the MSCI EAFE and EM Indexes were dominated by put options with maturities of less than a month (56% and 30%, respectively).1 It's clear that EM investors have selected maturities across various time horizons — and not flooded into shorter-dated options. This could be a reflection of a higher proportion of EM-option volumes coming from European exchanges, where the trend toward short-dated options has been less prevalent than on U.S. exchanges.
Though we have not seen the increased equity-market volatility some might have expected, it bears attention from investors as they build and maintain global portfolios.
Options linked to regional indexes
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Three-month rolling average of the percentage of options volumes in different maturity buckets for options linked to the MSCI EAFE Index, the MSCI EM Index and the S&P 500. Source: OptionMetrics
Why More Short-Dated Options Did Not Increase Market Volatility
U.S.-listed index and equity options were traded at record volumes in the first quarter of 2023, with maturities of less than a month accounting for 26% of total volume.
Evaluating Options in Different Macro and Volatility Regimes
Equity markets have been volatile, given an inflation surge, growth uncertainty and war in Ukraine. Some investors have looked to option strategies to manage volatility and/or target alternative risk/return profiles.
What Option Prices Say About Equity-Market Risk
The prices of put options imply an elevated chance of further drawdowns in the U.S. equity markets over the coming months.
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