At the moment, options are popular with ordinary retail investors. Previously only accessible to seasoned traders, these financial instruments essentially give you the right, but not the obligation, to buy or sell a security at a given price prior to or on an expiration date. Nowadays, everyone wants to profit quickly from changes in share prices and get a piece of the action without having to pay the full price of buying company stock.
- The volume of daily options trading has hit all-time highs so far this year.
- Retail investors are joining the market due to decreased commission costs, improved accessibility, and growing awareness of the advantages options offer.
- Increased options market participation, according to some analysts, will cause the stock market to fluctuate more.
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| Options Trading Hits Record Highs, Creating Volatility Concerns |
Setting a New Record in Option Trading
Cboe Global Markets believes that 2021 will be a watershed year for these derivative contracts. According to data from the Chicago Board Options Exchange and BATS Global Markets, nine of the ten busiest call options trading days in history have happened this year.
These findings, which were reported in the Wall Street Journal, are supported by data from the Options Clearing Corporation, which discovered that a record 39 million options contracts changed hands on an average day this year. This marks a 31% increase over 2020 and the biggest amount ever reported since exchange-traded options were initially traded in 1973.
Options trading has grown so popular that the current market value of these contracts has overtaken that of equities. According to the Wall Street Journal, Cboe stated that single stock options with a notional value of around $6.9 trillion have changed hands so far this month, up to September 22.
Big tech companies like Apple Inc. (AAPL) and Tesla Inc. (TSLA) are among the equities that have piqued the interest of options traders. According to a Wall Street Journal study, Apple options with a notional value of more than $20 billion have changed hands every day this year, compared to around $12 billion in the iPhone maker's shares. Tesla has seen an increase in inactivity. Approximately $80 billion in options on the electric automaker are said to have changed hands daily in 2021, representing over triple the sum traded in its shares.
Why Are Options So Popular Right Now?
Because options are more accessible and their advantages are better understood, they are becoming more and more popular among retail investors. For a substantially smaller investment, these products essentially allow investors to wager on the future direction of equity prices. They simply have to pay a premium to the other party in order to acquire the right to later buy or sell shares in a company at a fixed price. For a quick profit, they can even sell the investment to another investor; in the event that something goes wrong, they will only lose the premium.
Access to the options markets is now possible through online brokerages without having to pay outrageous fees. This has helped bring this type of trading into the mainstream, as has the growing number of mutual funds and exchange-traded funds (ETFs) that employ options-related strategies to increase portfolio returns.
Implications of Growing Option Trading
Although it is hard to dispute the advantages that options may offer to wise investors, there are rising concerns that the recent spike in activity could lead to problems. One common worry is that options promote short-termism and increase stock market volatility.
The Wall Street Journal reported in its story that the quick spike in GameStop Corp.'s (GME) share price was caused in part by the sale of a large number of call options on the shares. In general, when investors pay for the right to purchase shares at a predetermined price at a later date, the sellers of these options will buy to hedge their position, helping rising markets. The same is true for downturns. If a large number of investors begin to purchase bearish put options, the share price of the firm may fall further.
Another big worry is that people might be tempted to enter the derivatives market without fully understanding the terms and implications by recent success stories about option investments. The choices are quite obvious. But before you invest, you should understand them and know that they can cause losses just like any other investment product.
