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Options are now all the rage among regular retail investors. These financial instruments—which essentially give you the right, but not the obligation, to buy or sell a security at a predetermined price prior to or on an expiration date—used to be exclusively the domain of expert traders. Now everyone appears to want a piece of the action and make a quick buck off of share price movement without having to cough up the full cost of buying company stock.
- Daily options trading activity has hit record levels so far this year.
- Retail investors are getting in on the action due to greater accessibility, lower commission fees, and growing awareness of the benefits options bring.
- Some analysts have warned that heightened activity in the options market will lead to greater swings in the stock market.
Record Year for Options Trading
According to Cboe Global Markets, 2021 has been a breakout year for these derivative contracts. Data from the owner of the Chicago Board Options Exchange and BATS Global Markets indicates that nine of 10 of the most active call options trading days in history have occurred this year.
These findings, reported in the Wall Street Journal, are reinforced by figures from the Options Clearing Corporation, which found that a record 39 million options contracts have changed hands on an average day this year. This trading activity represents a 31% increase on 2020 and the highest amount ever recorded since exchange-traded options first started trading back in 1973.
Options trading has become so popular that the current value of these contracts in circulation has surpassed that of stocks. Cboe, as reported by the Wall Street Journal, revealed that so far this month, up until Sept. 22, single stock options with a notional value of roughly $6.9 trillion had changed hands, versus $5.8 trillion in company shares.
Big tech companies such as Apple Inc. (AAPL) and Tesla, Inc. (TSLA) are among the list of stocks that have attracted significant interest from options traders. According to analysis from the Wall Street Journal, Apple options with a notional value in excess of $20 billion have changed hands daily this year, compared with roughly $12 billion of the iPhone maker’s stock. Activity in Tesla has been even higher. About $80 billion worth of options in the electric carmaker has reportedly changed hands daily in 2021, representing approximately quadruple the value traded in its stock.
Why Are Options Now So Popular?
The growing popularity of options among retail investors has been credited to greater accessibility and awareness of the benefits they bring. Investors can use these instruments to effectively bet on the future price direction of stocks at a much smaller outlay. All they need to pay is a premium to the other party in the trade to secure the option to later buy or sell shares in a company at a fixed price. They can even sell the investment to another investor to make a quick profit and only stand to lose the premium spent if things go pear-shaped.
Nowadays, online brokerages provide access to the options markets without charging an arm and leg in commissions. This has helped to push this type of trading into the mainstream, as has a growing number of exchange-traded funds (ETFs) and mutual funds using options-related strategies to enhance portfolio returns.
Side Effects of Increased Options Trading
While it’s hard to argue with the advantages that options can provide to sensible investors, there are growing concerns that the recent spike in activity could create problems. A common worry is that options promote short-termism and greater volatility in stock markets.
In its article, the Wall Street Journal claimed that the rapid rise in Gamestop Corp.’s (GME) share price was triggered in part by lots of call options being made on the stock. Generally, when investors pay for the possibility to buy shares at a fixed price on a later date, the sellers of these options will buy to hedge their position, further contributing to rising markets. The same applies to downturns. Should lots of investors start buying bearish put options, it could exacerbate the sell-off of company shares.
Another big concern is that recent success stories about options investments will prompt other people to jump into the derivatives market without understanding the terms and full implications. Options are relatively straightforward in nature. However, it’s important to understand them before investing and be aware that they—like any other investment product—can cause losses.