NYSE: Short-dated equity options survey results
Trading options contracts on expiration day, also known as short-dated options, averaged more than 40% of SPY options volume in 2023. When Wednesday expirations were added to five ETFs1 in November 2023, short-dated trading has gained market share in all five of them. The industry has been discussing the reasons behind the short-dated trading phenomenon and debating whether additional expirations should be considered for single stocks.
While expiration days can enable more fine-tuned trading strategies and make event-based options strategies more efficient, the industry needs to approach single stocks carefully. There are risks that need to be considered, including expirations on the day of an earnings announcement, contra risk exercise and the potential of unintended consequences. The differing views on the topic - ranging from deep caution to unbridled enthusiasm - pointed to the need for more data and dialogue. We figured the easiest first step was to survey market participants.2
- Precision in options trading strategies was ranked as the #1 or #2 benefit for additional expirations by 79% of respondents.
- Contra Exercise Risk was mentioned by 51% of respondents as the top issue that needs to be addressed before adding single stock expirations.
- 45% of respondents say no more than five stocks should get additional expirations to start.
- Nearly all respondents believe that expanding expiration dates for single stocks would add operational overhead (see Exhibit 1). The processes that only need to happen one to four time a month3, would now be run as many as twenty times, including processes that require sending notifications and processing instructions from end clients. It is a manageable but non-trivial amount of work.
The risk of unintended consequences is an implication mentioned by two-thirds of respondents. Unintended consequences can be harder to manage because they tend to be harder to predict. Investor suitability entails the level of client awareness of short-dated options, when an options contract expires, and the impact of short-term movement as expiration approaches. Technology is an issue due to the massive amount of options market data that is already being generated. Adding an expiration day (and all the strike prices that go with that) would lead to even more market data.
Exhibit 1: What are the implications of adding more expiration dates?
(Select all that apply)
Source: NYSE
The most cited issue of single stock short-dated options is contra exercise risk4 (see Exhibit 2). While contra exercise risk exists today, it can only occur on expiration. It is less of an issue for short-dated ETF options because the most active ETFs trade until 4:15pm and ETFs are less prone to meaningful post-close price action. There is at least one way to eliminate or reduce contra exercise risk. Replacing the current system with market-wide exercise rules based on the closing print on expiration day would eliminate the risk. However, it is unlikely to happen because it would take the entire industry to adopt a new process.
Exhibit 2: What issues should be considered as part of adding expirations?
(Select all that apply)
Source: NYSE
Another measure that many participants believe should be considered is to prohibit the issuance of contracts that expire on the day a company is announcing earnings after the close. Post-close earnings announcements would increase the chances of contra exercise risk. Absent a change in exercise instruction process, prohibiting expirations on earnings would reduce the risk. Along the same lines, limiting single stock short-dated options to cash-settled products eliminates contra exercise risk because there is no way to profit from it.
The results of the survey clearly point out that any expansion of short-dated options to stocks should be a narrow group with liquidity and company size as the dominant factors in selecting the names. Nearly half of participants say that the listings should be limited to five or less stocks to start (see Exhibits 3&4).
Exhibits 3&4: What factors should determine if a stock should have Dailys? (Select all that apply) / How many stocks should expirations be added at first?
Source: NYSE
Since there are some issues that participants want addressed ahead of expanding expirations, it is worth revisiting the potential benefit of the effort. When asked to rank some potential benefits, the most popular answer was “Precision” with 47% and 32% of respondents ranking it number one and two, respectively. More frequent expirations could give investors more precision on time-sensitive trading strategies. While liquidity and leverage also garnered a decent number of votes, precision was by far and away the strongest benefit (see Exhibit 5)
Exhibit 5: Rank the following benefits of additional expiration dates.
(1=high, 4=low)
Source: NYSE
Although the noticeable uptake in existing Weekly and Daily options indicates demand for additional expirations, the industry needs to continue to discuss the implications and potential solutions mentioned above. Please consider us at NYSE as a source to facilitate these discussions in the months ahead.
1 USO, UNG, GLD, SLV, and TLT
2 The survey was conducted from 2/9/24-2/16/24. The 35 respondents represent a wide variety of the options trading industry, including retail and institutional brokerage and market makers. The purpose of the survey was to better represent the benefits and risks associated with expanding expiration dates to single stocks. The NYSE did not participate in the survey itself and our goal is to accurately reflect the opinions of the participants.z
3 Weekly options (Friday expirations) are available on approximately 500 single name stocks.
4 Contra exercise risk is most common when an options holder exercises a contract on expiration day that is out-of-the-money. Today, the closing print of the day determines the final moneyness of an options contract. Brokerages and clearinghouses follow simple logic to auto-exercise contracts. However, traders have until 5:30pm to send in alternative instructions. The issue is that not all traders may be aware or able to access this functionality.