OPINION Capital Market Focus

Expected Benefits of Introducing KOSPI200

Weekly Options
Nam, Gilnam*

KOSPI200 weekly options, whose launch is slate for September 2019, are
one-week options that have been already traded vibrantly across the globe.
Although the introduction of weekly options may lead to the fragmentation of
the KOSPI200 options market, it will satisfy investors looking for shorter-dated
options who cannot be covered by existing options products. Furthermore,
weekly options will provide investors with an effective tool to respond to
unexpected market events while helping options trading become less
concentrated in near expiration dates.

On May 30, 2019, Korea’s financial authorities said that they would introduce KOSPI200
weekly options as part of measures to develop the derivatives market for supporting innovative
growth and the real economy.1) Weekly options or weeklys generally have the same contract
specifications as standard options, except that they only exist for a week. These short-term
options will be launched for the first time in Korea. This article explores the expected benefits of
introducing weekly options by drawing on other countries’ experiences.

Is Korea ahead of others in introducing weekly options?

Since call options on stocks began trading for the first time on the U.S. Chicago Board Options
Exchange (CBOE) in 1973, these exchange-traded derivatives have received a lot of investor
attention. Faced with growing investor demand for shorter-dated options than index options
structured to expire in one month, the CBOE began a pilot program with weekly options on S&P
* All opinions expressed in this paper represent the author’s personal views and thus should not be interpreted as Korea Capital
Market Institute’s official position.
* Ph.D., Senior Research Fellow, Capital Market Analysis and Forecasting Department, Tel: 82-2-3771-0687, E-mail: namgn@kcmi.re.kr
1) Korea Exchange (KRX) plans to list KOSPI200 weekly options in September 2019.

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500 index in 2005 after receiving approval from the Securities and Exchange Commission (SEC).
Eventually, the CBOE launched S&P500 weekly options in the second half of 2009. Other major
exchanges followed the suit. As a result, various weekly options came to market in mid-2010.
Weeklys became available on more indices including S&P 500, Dow Jones Industrial Average
(DJIA), NASDAQ 100, Russell 2000, volatility index (VIX), exchange-traded funds (ETF), etc.
Further, options on bonds, currencies, and commodities such as crude oil and gold have been
added to the list. It is notable that weekly options have taken hold as a new product in the
exchanges of East Asian countries as the Taiwan Futures Exchange (TAIFEX) launched TAIEX
weekly options in November 2012, and the Japan Exchange Group (JPX) introduced Nikkei 225
weekly options in April 2015. Korea appears to move slower than other countries as it plans to
launch KOSPI200 weekly options in September 2019.

Table 1. Weekly options offered by major exchanges

Month/year of
Exchange Underlying assets
initial launch
CBOE Aug. 2009 S&P 500, Russell 2000, VIX, stocks, ETF
CME Aug. 2009 S&P 500 futures (including E-mini), E-mini NASDAQ 100, E-mini Dow ($5)
COMEX Dec. 2013 Gold
NYMEX Nov. 2013 Crude Oil
LSEDM May 2016 FTSE 100
TAIFEX Nov. 2012 TAIEX
JPX Apr. 2015 Nikkei 225
KRX Sept. 2019 KOSPI200
Source: Each of the exchanges shown above

Does weekly options trading make a dent in standard monthly options trading?

When S&P 500 weekly options were brought to the U.S. derivatives market, concerns
were raised that the arrival of the new instrument would give rise to market fragmentation, a
contraction in monthly options trading volume, and ultimately a reduction in overall options
trading volume. The CBOE saw a surge in the volume of S&P 500 weekly options from 71,000
contracts in 2011 to 455,000 contracts in 2015, with an increase in the weeklys proportion of
the options market from 8% to 50%.

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Despite the aforementioned drawback, weekly options also seem to have some advantages.
For example, as weeklys trading volume grew, the overall trading volume in the U.S. options
market rose as well. The Chicago Mercantile Exchange (CME) saw a big spike in the weeklys
proportion of the total options trading volume from 10.1% in 2013 to 41.1% in 2016 since it
launched weekly options on S&P 500 futures. Over the same period, the overall trading volume
of S&P 500 futures options also increased from 8.71 million contracts to 13.15 million contracts.
The same phenomenon occurred in weekly options on E-mini S&P 500 futures.

Figure 1. Changes in the trading volumes of CME options and weekly options on S&P
500 futures, and their proportions of the total trading volume
S&P futures options (LHS) E-mini S&P futures options (RHS)

Source: CME, FIA

The case of S&P 500 weekly options is certainly insufficient to conclude that the introduction
of weekly options would lead to an increase in overall options trading volume. As in the
U.S. market, the proportion of weekly options trading in the Taiwan options market rose
substantially, but this did not result in an increase in the overall options volume. In the Japanese
market, the proportion of weekly options trading remained below 2% for four years since the
launch of the new options product.
This makes it hard to say that the introduction of weekly options would give a boost to the
options market. But it would have positive impacts on the market as seen in the U.S. market if it
could satisfy potential investor demand for weekly options and bring more efficiency to the market.

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What are the advantages of trading weekly options?

One key advantage of weekly options is that weekly options satisfy investor demand for
options that have a shorter maturity than standard monthly options. In Taiwan where weekly
options were first introduced in November 2012, the average daily volume of monthly options
was between 310,000 and 430,000 contracts during three out of four weeks (T-3 to T-1) except
the options expiration week (T) in 2012, and between 210,000 and 280,000 contracts in 2013,
showing a 34 to 43% decline. The average daily volume of weekly options was between 180,000
and 220,000 contracts during the same period (See Figure 2). In other words, weekly options
trading took the place of a significant portion of monthly options trading during non-expiration
weeks (between T-3 and T-1), which allows us to infer that this trading volume mirrors potential
demand for trading options during the expiration week.
Furthermore, weekly options trading could ease the concentration of monthly options
trading on nearby maturities. For standard options with a one-month maturity, trading volume
during the expiration week (T) is larger than that during the other three weeks (between
T-3 and T-1). In 2012, shortly before the launch of weekly options, monthly options trading
volume on the TAIEX was 580,000 contracts during the expiration week (T), 150,000 to 270,000
contracts greater than the trading volume during non-expiration weeks, exhibiting the trading
concentration. After the adoption of weekly options, 2013 saw a 20% fall in the monthly options
volume with 460,000 contracts, showing lower concentration on the expiration week (T).

Figure 2. Trading volumes of monthly vs. weekly options on the TAIEX (2012 vs. 2013)

Source: TAIFEX, KRX

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In addition, using weekly options gives investors a tool to more sensitively respond to
important market events. According to Chatrath et al. (2015)2) investigating abnormal trading
volume and implied volatility ratios3) for standard options and weekly options before and after
the Save-the-Euro Summit on the eurozon financial crisis between January 2011 and May 2012,
the abnormal trading volume ratio for standard options dropped from 21% to 14%, from three
days before the eKvent day (D-3) to two days before the event day (D-2) while that of weekly
options fell more sharply from 44% to 24%. The abnormal implied volatility ratio for standard
options picked up from 20% to 25% between D-3 and D-2, but that for weekly options rose
more dramatically from 21% to 52%. All these indicate that event-related information flow was
more sensitively reflected in weekly options than standard options.

Figure 3. S&P 500 weekly call options before and after the emergency summit
on the eurozone crisis
Abnormal trading volume ratio (LHS) Abnormal implied volatility ratio (RHS)

Note: The first of the above two zeros (‘0’) at the time of the event indicates the first day of the two-day summit or the day
before the summit.
Source: Recompiled based on Chatrath et al. (2015)

2) Chatrath, A., Christie-David, R.A., Miao, H., Ramchander, S., 2015, Short-term options: clienteles, market segmentation, and event
trading, Journal of Banking & Finance 61, 237-250.
3) The abnormal trading volume ratio is computed by subtracting the average of options trading volumes from the trading volume on
a given event day and then dividing the result by the average trading volume. The abnormal implied volatility ratio is calculated by
subtracting the average of the implied volatilities of options from the implied volatility on an event day and dividing the resulting
volatility by the average implied volatility.

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Implications

Learning from the experiences of the U.S. and Taiwan, the introduction of weekly options
may lead to a contraction in the trading volume of standard monthly options. However, if
weeklys meet potential investor demand that standard monthly options cannot fully satisfy,
and trading on arbitrage between weekly and monthly options increases, the overall trading
volume in the options market would grow as well, thus creating a virtuous cycle. Compared
with standard monthly options, weekly options have shorter duration, enabling investors to
effectively respond to unexpected market events, and curbing the concentration of trading in
near expiration dates. But when looking at the Taiwan market where weekly options trading
is often used for speculative purposes by individual investors, it is hard to argue that the
introduction of weekly options will bring about only positive impacts.4)
Given the Korean derivatives market’s current position, the planned launch of KOSPI200
weekly options in September 2019 seems belated, compared to rival markets. Nevertheless, it
could contribute to building more efficient capital markets, if weekly options operate in a way
that meets investor demand and reduces their negative impacts by referring to the introduction
of weekly options in other countries.

4) Pan, G.G., Shiu, Y.M., Wu, T.C., 2018, Analysis of the clientele effect and the information content of short-term index option returns
in Taiwan, Journal of Futures Markets 38(6), 715-730.