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Is there a regulatory reason that only AEX has daily options

Personal Finance & Money Asked on June 21, 2021

There is a lot of press over the years about the success of daily options contracts and expirations on the AEX-index.

AEX is Amsterdam’s stock index, an economic indicator for the Netherlands share market. Given that AEX index options are listed on Euronext which is now a multinational mega exchange owned by New York Stock Exchange, I can’t for the Liffe of me understand why daily options haven’t been rolled out on other indices sometime over the last decade.

Disclaimer: This affects me personally.

In the US, CBOE submitted documents to the SEC in 2010 regarding the listing of daily options, no resolution came of this.

In Europe, there should be different regulators and nuances, and it is equally perplexing why I can only find AEX in the Netherlands that trades daily options that are only listed on a multinational exchange that is requesting the existence of financial products in many countries in a free trade union.

I’m not ruling out the existence of other products that have daily options, I just can’t find any information about them, it could very well exist in a different language.

So this is a two pronged question:

  1. Are there other products that have daily options

  2. If not, why does only AEX have daily options?

(Note: I’m not interested in “binary options”)

2 Answers

Are there other products that have daily options.

I am not familiar with other markets where daily options exist.

Why does only AEX have daily options?

Cost

I would say there is limited benefit to having daily options, while there is a certain amount of overhead (cost) with having new options listed.

For each option contract (expiration, strike and call or put) that is listed, the exchange usually has to enlist a market maker or two (or more) who will continuously provide bids and offers for all of the options on that underlying. All of those options have to be updated when the price changes in the underlying market, the data consumes bandwidth on dedicated data links, and the bandwidth costs money.
Each unique position has to be managed for risk and valued, and consumes capacity on the market participants computers as well as the exchange computers.

Critical Mass

If these contracts are not heavily traded then market makers will not see any benefit in being more aggressive on the spreads, so spreads will remain wide, so people will tend not to trade them... and so on.

Motivation

The exchanges have been keen to increase their contract volumes (that's how they get paid) so they have tried various ways to increase the number of contracts with the hope that by having more choices, people will trade more. But what happens is other market participants become skeptical particularly without any obvious additional profit potential, so don't they don't make any extra effort to participate but complain to the exchange about the bandwidth and administrative costs, so that after a few months, the initiative gets abandoned.

In an environment where option volumes are decreasing, exchanges will listen to those who have ideas about how they can get more volume, but many of these ideas tend to fall through. Superficially they sound like a way the exchange can bring in more volume, but the exchanges don't get the buy-in of the market makers to make any real effort.

Market makers now are having a tough time with many closing down completely because they're unable to cover their overhead costs.

History

We have seen this in the US with:

  • The dollar strike program. Exchanges experimented with having options with $1.00 price increments between option prices. This is largely abandoned.

  • Weekly options. The OCC implemented an entire rewrite of the option symbology ("OSI") so they could have arbitrary expiration dates, strikes, but even today there is still much more liquidity in the 'regular' monthly expirations than the weeklies.

Lack of Profit

Also, there is a tendency for the smaller granularity expiration periods only to be used with near-term expirations. For example, it doesn't really matter if an option you buy expires on January 17th 2020, or January 16th 2020, but people are more interested in the next few days.

However, option market makers make their money from premiums (rather than transaction fees) which increase the further you go into the future - options two years out are more expensive than options that expire in the next few days. As a result they would be less willing to trade near-term options as they would make less revenue for the same transaction costs.

Alternatives

There are some mechanisms to create custom options (e.g. flex options) but these are not widely used.

Is there a regulatory reason that only AEX has daily options?

No. Mainly business reasons. Though obviously any new (US) option type has to go through the SRO rule-making process to become effective.

Answered by xirt on June 21, 2021

Yes. Other daily index options are available. I have in front of me the IG Index app and this offers daily index options in a dozen major world indices. However, whereas the AEX index options have a spread of, typically, 0.2 points through the Dutch broker that I use (Degiro), the same options are traded through IG with a typical spread of 1 point. The regulatory regimes will restrict what is available in different countries however, looking at the cost of dealing through IG, I doubt that their platform will be of much interest.

Answered by David on June 21, 2021

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