Open interest on E-mini futures surges; S&P 500 vol relents

Open interest on Nasdaq 100 and S&P E-mini futures contracts, electronically traded index futures and options that are smaller than standard futures contracts, has increased by 63% and 15%, respectively, since October. The ratio of open interest to volume for these contracts is also increasing, suggesting that institutions are making increased use of E-minis, according to Goldman Sachs equity derivatives research.

Until recently this ratio was low, reflecting the short-time horizon plays of traders. And in a move to lure in more institutional investors keen to gain exposure to mid-cap companies, the Chicago Mercantile Exchange (CME) said last week that it will offer E-mini Standard & Poor’s (S&P) MidCap 400 futures contracts from January 28 2002.

"The ability to trade E-mini S&P MidCap 400 futures will provide individuals and smaller institutions with access to an important portion of the US equity market," said Satish Nandapurkar, a managing director in products and services at the CME. These contracts will be traded on the CME’s Globex trading system and will be sized at $100 times the S&P MidCap 400 index price – or one-fifth of the standard size middle capitalisation futures contract.

Meanwhile, the S&P 500 skew – 25 delta put minus 25 delta call volatility - has finally eased to around 6%. The skew peaked at 9.3% in late September on the back of the equity market downturn, when investors rushed to buy out-of-the-money put options for downside protection, and had traded above 7% until a month ago. A main driver of the shift in the skew was a sharp decline in S&P 500 average stock vol. For example, vol for three-month options declined during November, nearly reaching levels experienced in the early summer – the lowest vols since before the 1998 Russian default crisis, according to Goldman Sachs.

In Europe, implied vol fell most noticeably on the Euro Stoxx 50 and Dax. The spread between at-the-money options and out-of-the-money puts fell by one point. In general, the reduction in the implied vol skew indicates reduced risk aversion in Europe. The collapse in the skew and the fall in implied vol has made zero-premium collars an attractive trade on some European indexes, according to Goldman Sachs.