New Quarterly Options On Top ETFs

Includes: DIA, IWM, QQQ, SPY, XLE
by: IndexUniverse

Both the International Securities Exchange [ISE] and the New York Stock Exchange’s Arca unit (NYSE Arca) have launched “quarterly” options contracts on five of the most popular exchange-traded funds: the Diamond Trust (NYSEARCA:DIA), Energy Select Sector SPDR Fund (NYSEARCA:XLE), iShares Russell 2000 Index Fund (NYSEARCA:IWM), Nasdaq 100 Trust (QQQQ) and Standard & Poor's Depository Receipts (NYSEARCA:SPY).

Unlike traditional options, which expire on the third Friday of each month, the new options will expire at the end of the calendar quarter – i.e., the last day in March, June, September and December. The move will align expiration with the quarterly reporting standards of most mutual funds and institutional investors. (No one I contacted could quite explain why options settle on the third Friday of the month - the best explanation I heard was that very few holidays fall on the third Friday of the month. Anyone with other historical insights, please leave a message below.)

“We look forward to offering this alternative Quarterly expiration structure to our customers to allow them to better align options expirations with their equity trading practices," said David Krell, President and Chief Executive Officer of ISE. "We anticipate that this flexible product, developed to meet our clients' needs, will support new investment strategies."

The ISE beat the NYSE to the punch on the quarterly options launch, debuting its products on July 10. But the NYSE was only a week-and-a-half behind, launching its products on July 19, and it is too early to say if one exchange will dominate the market. The NYSE recently slashed the fees it charges on options trading – and eliminated fees for specialists buying ETFs – in an attempt to make their market more competitive.

Options For Any Expiration

The launch of “quarterlies” is just the latest timing innovation in the formerly staid options industry, where, until recently, all options expired on the third Friday of the month.

In May, the Chicago Mercantile Exchange [CME] launched “monthly” expiration options, which expire on the last calendar day of each month. Like the quarterlies, the monthlies are designed to align expiration with the standard end-of-month accounting of most major investors.

Last year, the Chicago Board Options Exchange [CBOE] launched weekly-expiration options, or weeklies, designed to let traders take advantage of short-term developments in the markets. And most of the major options exchanges are currently at work on event-driven options, often yes/no products designed to expire in concert with important market-related events, like Federal Reserve interest rate decisions.

Fallout From McGraw-Hill

The product launches from the ISE and the NYSE Arca appear to be the first significant fallout from the recent McGraw-Hill vs. ISE legal decision, which found that exchanges do not have to pay licensing fees to launch options on index-linked ETFs. Under the new ruling, neither the NYSE nor the ISE needed to license the ETFs from the index providers. Expect to see additional launching covering an increasing number of ETFs in the future.