CBOE Panel Says Options’ High Post-Crash Prices OK
The doubling and tripling of prices for stock index options on the day after the stock market’s collapse in October was understandable, a Chicago Board Options Exchange panel has concluded.
The premiums traders paid for the CBOE’s popular options on the Standard & Poor’s 100 stock index soared Oct. 20, when the Dow Jones industrial average seesawed in a 400-point range one day after it fell more than 508 points.
A CBOE panel formed to investigate price movements during that extremely volatile period reported its findings to the exchange’s board of directors last week, CBOE President Charles Henry said in a telephone interview Monday.
“The panel’s conclusion was that the prices were understandable,” Henry said. “There was no precedent for that kind of volatility in the marketplace.”
He said fear and confusion reigned on Chicago’s futures and options markets on the morning after Black Monday as trading in many stocks on the New York Stock Exchange was delayed while overloaded computers tried to sort out a deluge of sell orders.
The Wall Street delay, along with rumors that the NYSE was about to suspend stock trading altogether, prompted the CBOE to suspend trading temporarily in S&P; 100 stock index options and the Chicago Mercantile Exchange to suspend trading temporarily in its S&P; 500 stock index futures.
“There was tremendous fear in this market as in other markets,” Henry said.
“As a result, premium levels for options reached levels we hadn’t seen before,” he said. “Of course, everything we were seeing, we hadn’t seen before.”
The CBOE, the nation’s largest options exchange, is also the country’s most active market for stock index options.
Investors use stock index options to hedge against losses in the stock market. Speculators also use options to bet on the stock market’s performance.
Some analysts have estimated stock index options losses during and immediately after the stock market’s collapse at several hundred million dollars.
Henry said the exchange was analyzing customer complaints and hoped to learn the actual amount of losses within the next few weeks.