Options on futures markets are seeing rapid growth in trading volumes as investors expand their use of these instruments in hedging and volatility strategies.
This is especially so as investors have anticipated changes in the winding down of the US Federal Reserve’s quantitative easing (QE) programme, generating strong growth in interest rate derivatives markets.
According to new research from TABB, “Options on Futures: A Market Primed for Further Expansion,” options on futures trading volume is expected to remain strong in 2014, growing 15 per cent, as fiscal policy shifts and increased volatility drive market activity.
“Leveraging growing liquidity, investors are turning to options on futures as part of their volatility and hedging strategies,” says Matt Simon, TABB’s head of futures derivatives research and author of the report.
With their launch more than 30 years ago, options on futures have seen steady growth in volume. According to Simon, futures options contract volumes from 1999 to 2014 (estimated) show a 15-year CAGR (compound annual growth rate) of 13 per cent.
“Despite their steady growth – options on futures markets are still in their relative infancy when compared to other derivatives markets – TABB Group sees rising volumes in 2014 and beyond as investors seek out new sources of alpha in their trading strategies,” Simon says. “As investor demand has focused on new trading opportunities in options on futures, they are looking for electronic tools that can support direct access and more complex capabilities.”
Simon believes that rising global equity trading volumes will drive growth in the equity-options segment while improving economies around the globe will expand international trade and cross-border investment, increasing demand for options on currency futures to hedge FX risk.
“The futures options markets are poised to become much larger. As interest rate policies change, alternative energy sources emerge and underlying reference futures markets appeal to a wider audience, rising demand from institutions, electronification and improved market access will drive future volume growth.”