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SKF Eats World


A real decline in options interest.

Have the leveraged monsters officially taken over the world, as some pundits suggests?


SKF traded 32,778,100 shares on Tuesday and closed at 169.10. Accounting for that fact that each share bets on -2x the move in IYF, that represents a whopping $11,085,553,420 in market value of financials transacted.

Theoretically, each trade can be offset by a basket of the component stocks, so we can translate that $11 billion number into component shares. In other words, if Bank XYZ comprises 10% of the index, then SKF trading theoretically accounts for $1,108,555,302 worth of XYZ trading.

If $22 billion of XYZ itself traded, we could say SKF volume accounted for about 5% of the total volume of XYZ. Which would lead me to conclude the mere existence of SKF did not have all that much impact on XYZ trading. Especially since much of the SKF volume represents quick trades up and back, and is never hedged with actual stocks.

That's not what I found, though. The numbers are unreal. SKF theoretically accounts for 50% of the volume of the largest component, JPMorgan (JPM). And that was about average for the 10 I looked at. TRV was an absurd 90%, for example.

And mind you, this was just SKF. FAZ adds another $3.3 billion.

Now I realize these boots are for trading, and hardly any baskets go up. And there's regular ETFs and so on that can trade against them.

But still.

I've looked at numbers like these from time to, time as there's often a whole lot of misplaced bloviating going on about ETFs and how they're destroying the world. But you can make a case for this one - it's at the point where it can overwhelm the what remains of the financial equity space.

Options though? That's another story.

Up top, we have graphs for daily options volume and open interest in SKF; down below we have the same for FAZ. That's the whole history for FAZ, so pay more attention to the absolute numbers than the exponential "growth."

SKF in fact has lower volume and way lower open interest than it did at the September peaks.

Now you say say, why not add the 2 together?

Okay - but you have to adjust for price levels and the leverage. And if you do that at today's prices, then each FAZ contract equals roughly 60% of an SKF contract. Which still gets total financial leveraged ETF volume nowhere near the September and October levels.

What's it all mean?

Well, I could list many reasons not to trade options in either of these. They're wide and illiquid. The volatility moves incredibly swiftly (Febs in FAZ lifted 100 volatility points on Tuesday, to name one example).

But perhaps most importantly, SKF and FAZ behave somewhat like options in and of themselves. So throwing an actual option into play compounds the complexity.

Or it's possible that it's just a function of options volume tapering off across the board since September/October.

That has indeed happened. But here's the difference: So has actual volume in ETFs like SPY, whereas volume in SKF and the SKF/FAZ combo has increased.

So it does suggest a real decline in options interest.

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No positions in stocks mentioned.
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