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Pandemic-induced options trading craze shows no signs of slowing down

Traders work on the floor of the NYSE in New York.


Options trading is the new sports betting.

Talk about unintended consequences.

The stay-at-home requirement created by Covid-19 has spawned a huge sub-industry in options trading in tandem with an increase in equities trading that shows no signs of letting up.  

Trading in equity options hit new highs in November, continuing a trend that began earlier in the year.

Equity option trading is 50% above last year’s levels year to date on all the options platforms.

Equity options (volume)

  • Nasdaq  49%
  • CBOE    51%
  • ICE         58%

Source:  Piper Sandler

“The public is embracing options in a truly unprecedented manner, as you can see from the volumes,” Steve Sosnick from Interactive Brokers told me. “I attribute some of the popularity to the lockdown … People were stuck at home, many with $1,200 checks or rent/loan moratoria and no sports to watch or bet on.  So they went to the stock market, then realized that options have similar payoff structures to sports bets.”

That analogy to sports betting is deliberate: “The psychology [of sports betting versus betting on stocks] is very similar. With sports gambling, I stand to make some percentage of the money.  It’s the same thing with stocks and options, but with stocks and options there is thousands of bets you can make every day, and when you are in an up market like we have been experiencing, you can come to believe that the odds really are in your favor.”

Kyle Robinson, who tracks trading activity at Piper Sandler, noted that much of the trading activity has occurred in out-of-the-money options that are approaching expiration, with much of it day trading: buying in the morning, and getting out in the afternoon.

Why that type of activity? “They are trading options because many don’t have the money to buy a lot of the stocks,” he told me. “You can buy options for a fraction of the price, and if you have options that move the same percent as the underlying stock, you can make money as if you owned the stock.”

Sosnick noted that, far from acting irrationally, many day traders are correct to target options trading.

“How else are you going to buy an Amazon or a Tesla? Buying options makes some sense for people who want to participate in those kinds of trades.”

Buying out of the money calls, he noted, have a limited outlay, so you can only lose what you put in.  “You buy a call for a dollar, you can only lose a dollar.” As for why many are doing simple day trading, in during the morning and out by the close, Sosnick speculated that, “They may be poorly capitalized. They may want to be able to sleep at night.  It may be the only strategy they know.”

Also helping the day trading phenomenon: zero commissions on many trades, and the presence of social media and chat rooms that are full of discussions on high profile names.

Another major factor: the presence of educational materials that are teaching traders how to trade options.

“We have seen no dropoff in the interest in education material on our website,” JJ Kinahan, Chief Market Strategist at TD Ameritrade. “The most watched videos on our site are first, stock fundamentals, and second, getting started with options.”  He noted that viewing of that material remains three times higher than it was a year ago.

Equity trading also way up

The increase in options trading is happening in tandem with a similar increase in equity trading. At Fidelity, trading volume in the third quarter is up 97% from a year ago, for example.

At Interactive Brokers, daily average revenue trades (DARTs) for November were up 174% over the same period last year, according to Rich Repetto at Piper Sandler.  They also added 29,000 new accounts.

“We are raising our 4Q20 EPS estimate due to stronger than anticipated trading, continued account growth and strong margin balance and customer equity growth,” Repetto wrote in a recent note to clients.

Robinson noted that he is not seeing the same dramatic increase i