Abstract
This paper documents the history of aggregate positions in U.S. index options and investigates the driving factors behind use of this class of derivatives. The goal is to identify basic properties of the level, trend, and covariates of options quantities in order to provide benchmark facts for equilibrium theories of derivatives usage. The outstanding quantity of options in terms of market value or volatility exposure is small, which may pose a challenge to models that invoke population heterogeneity to explain trading volume. The nonstationary component of aggregate options exposure is well described as driven by the stochastic trend in equity market activity, consistent with the latter being a general proxy for technology and heterogeneity. The notional quantity of outstanding options exhibits statistically strong risk effects. However, the sign of the response is different for different dimensions of risk. This suggests that theoretical models will need to include heterogeneity in investor risk perception.
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