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Friday, December 21st 2018

How Options Markets During the Short Vol Crash of 2/5/18 Stack Up Against the Flash Crash of 8/24/15.

How Options Markets During the Short Vol Crash of 2/5/18 Stack Up Against the Flash Crash of 8/24/15.

Summary

During the Short Vol Crash of 2/5/18, options markets deteriorated more than during the Flash Crash of 8/24/15, with markets widening and posted size falling, costing options traders over a billion in slippage. The SPY was down about the same amount on both days, but the width and size on the bid & ask were worse in 2018. The fragility in the options market can be attributed to the falling number of market makers and other posted liquidity providers.

The options markets deteriorated during the 2/5/18 crash with markets widening and posted size on the markets falling and cost options traders plenty.

It is helpful to give some context to the amount of deterioration that would be expected based on a comparison to the last similar event, the Flash Crash of 8/24/15.

Both days the SPY was down about the same amount 4.1% 8/24/15 & 4.2% on 2/5/2018. The ORATS one day volatility was similar 55% in 2015 and 60% in 2018. (Note that typical measures of volatility like close-to-close do not measure one day volatility but ORATS has designed one that does.)

The options markets deteriorated MORE in 2018 than in 2015 on the event days:

  • In the flash crash of 2015 the width went from 10.1% to 15.0% (up 48%) and in 2018 the width went from 8.2% to 16.6% (up 102%).
  • In 2015 the size on the bid & ask went from 337 to 276 (down 18%) and in 2018 size went from 138 to 100 (down 28%)

The fragility in the options market can be attributed to the falling number of market makers and other posted liquidity providers.

 

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