E WhatsTrading Recap - 02/19/2015

The grind continues Thursday. The S&P 500 made a morning run to 2090.79 and has chopped a bit higher since that time. With less than an hour until the closing bell, the index is flat.

Treasury bonds are seeing modest weakness and the yield on the benchmark ten-year ticked to more than 2.1%. Gold added $8 to $1208 and crude lost 85 cents to $52.

Utilities (XLU), consumer staples (XLP), financials (XLF) ticked lower. Tech (XLF), consumer cyclicals (XLY), healthcare (XLV) are seeing relative strength.

However, for the third time this week, there’s been little intraday volatility. CBOE Volatility Index (VIX) is off .27 to 15.18.

Overall options volumes are running at the best levels so far this week. Projected volume for the day is 15.8 million contracts. That, however, is about 3% below the one month average.

In fact, for the month, average daily options volume across the exchanges so far is 16.1 million contracts. That, in turn, represents a 12.9% drop from February 2014 and a 10% decline from a month ago.

What’s going on? Why is the options industry seeing such a significant drop in trading activity? Several reasons.

1) February 2014 and January 2015 were more volatile than the market action so far this month and trading volumes tend to pick up along with volatility.

2) For whatever reason, share volume has been light as well – investor apathy maybe?

3) Cold weather in New York and Chicago has played a role

4) Earnings reporting season is winding down, economic data has been lackluster, and the Fed has more or less telegraphed its next move. There are few immediate market catalysts.

5) The options industry is doing a horrible job of communicating the value of using options as part of a longer-term plan. On the one hand, exchanges have made efforts to attract retail investors by launching products like very short-term contracts (Weeklys) and other new products. Their goal, obviously, is to promote additional trading activity, but ultimately options that expire in days rather than months are not ideal investments for most individual investors. Second, outside of a few reputable organizations (like the OIC), the “education” component of the options industry is dominated by self-promoting quacks teaching options as short-term speculative trades rather than long-term investment tools. I’m talking about the “Fast Money” crowd and the options market cheerleaders that get all lathered up if a big block of calls goes up on XYZ and that wants to convince you that trading options will somehow unlock instant gratification – if you only sign up to a chat room, attend a free seminar, or subscribe to this or that newsletter. Long story short, the option industry’s self-inflicted image problem might be one reason overall options volumes are well off month ago and year ago levels.

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