Journalists and analysts who write about options sometimes like to compare the size of one country’s market to another. To do so, they almost always quote the number of contracts traded. It’s typically the easiest metric to find in public data. And there’s a certain intuitive sense in measuring the size of a market by counting up the number of contracts that change hands.

Sensible, but not always the best choice. In fact, it’s a method that can often be misleading or lead to conclusions that are flat-out wrong. An option contract in Brazil, for instance, can represent a very different economic value than a contract in the US. Two markets can both trade a million options contracts a day, but if the economic size represented by them is different, the comparison is meaningless.

Counting up the number of traded contracts has its uses. For instance, it’s a good way of measuring the traded volume of a single product over time, as long as the contract multiplier remains constant. But it fails when it comes to comparing the true scale of trading across different products or regions.

Depending on what’s being measured, either of the following methods can provide more meaningful context.

Notional traded

Making a true apples-to-apples comparison between options markets requires taking into account the economic size of the contracts traded. To do so, we can use the Notional Traded. This metric represents the underlying market value that is traded, regardless of the contract’s specifications. In this sense, it measures the total economic value of those contracts. It’s calculated by multiplying by the number of contracts by the contract multiplier and the underlying asset’s price.

Premium traded

Another method that can be meaningful is Premium Traded. This measures the actual cash outlay and risk taken by investors when trading options. It incorporates differences in volatility, maturity and moneyness between contracts. It’s calculated by multiplying the number of contracts by the contract multiplier and the option premium.

Here’s a quick glance at the strengths (and pitfalls) of these various measurement tools:

^{Source: Optiver}

Let’s put these measures to the test. Suppose we want to compare the size of index options markets across Brazil, India, Europe and the US. For ease of comparison, we’ll look at options on the main stock index of each country/region, so the IBOV, NIFTY, S&P 500 (SPX) and EuroStoxx 50 (ESX) indexes.

Here’s how these markets compare by contracts traded. As you can see, India dwarfs the rest of the world. Brazil’s IBOV is the second-largest market under this metric.

But now let’s switch to measuring the size of each market by notional traded. India’s NIFTY is still the biggest of the four, but the US’s SPX is nearly the same size. This is explained by the difference in economic size a single option contract represents in USD terms.  

Finally, if we switch to using premium traded, the ranking changes yet again. Here you will see markets with higher implied volatility or more long-dated trading generating relatively more premium traded.  Looking at this metric, SPX moves into the top position, followed by India’s NIFTY, Europe’s ESX and Brazil’s IBOV.

The lesson is that if you wish to understand the real size of options markets, don’t stop at contract counts. Look at notional and premium traded too. They can reveal very different – and often more meaningful – insights.

To discuss this paper – or any other market structure topic – reach out to the Optiver Corporate Strategy team at [email protected]

^{DISCLAIMER: Optiver V.O.F. or “Optiver” is a market maker licensed by the Dutch authority for the financial markets to conduct the investment activity of dealing on own account. This communication and all information contained herein does not constitute investment advice, investment research, financial analysis, or constitute any activity other than dealing on own account}