People wait in line to buy t-shirts at a Robinhood online brokerage pop-up kiosk along Wall Street after the company’s initial public offering on July 29, 2021, in New York City. New York City.
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Stock options became popular on Main Street this year as more and more retail investors began to execute high-speed derivatives trades, but most of them are playing a losing game due to lack of money. access to more complex strategies.
A record 39 million options contracts were traded on average daily this year, up 35% from 2020, according to Options Clearing Corp. Retail investors account for more than 25% of total options trading, due to easy access through commission-free online brokers, according to data from Alphacution Research Conservatory.
A startling majority of the small traders these days are buying the most basic put and put options, which have a much lower probability of profitability than advanced strategies investors can afford. not easy to grasp, such as options spreads.
For example, 11% of Robinhood’s monthly active users have traded options in the first three quarters of 2021. Meanwhile, less than 1% have executed multi-legged options trading, which involves two or more transaction at the same time.
“Everybody in the business knows that if you just buy calls, you can lose money over time,” said John Foley, CEO of Options AI. “The democratization question shouldn’t be ‘can I trade options?’ but ‘can I have easy access to the options strategies that Wall Street uses?’ The playing field isn’t level right now and nobody’s really focused on that.”
An option is a type of derivative contract that gives the buyer the right to buy or sell a security at a selected price at some point in the future. Multi-legged options arbitrage involves buying and selling options on the same underlying security simultaneously, a popular way to hedge risk. These multi-legged strategies can be a bit cheaper because the money the investor makes from selling the option will partially offset the cost of the purchase.
Below is an example of various trades using Tesla options based on real-time prices at midday Tuesday. In this case, a typical retail investor is paying more for bets with a lower chance of return when a cheaper option with a higher probability of winning exists.
Most popular brokers have three to five levels of options trading that they give investors access to based on their trading experience, income, and risk profile. For example, options arbitrage – which involves using multiple options to hedge risk – isn’t available to most investors until they graduate high school. So basically, New traders must learn options by trial and error before they can use strategies Wall Street pros have been making profits for decades.
“Robinhood investors are the most novice among retail investors,” said Paul Rowady, research director at Alphacution Research Conservatory. “The question is, how do I influence new, often very young investors to use a frictionless and high-scoring app for the first time? How do I get them to give it a try? payment-based options for command lines. These fees are a significant lucrative component of their revenue model.”
Robinhood made $164 million from options trading in the third quarter, tripled transaction-based revenue from stock trading. The brokerage had 22.4 million net accrual accounts as of Q3, down from 22.5 million in Q2.
“Of course, we know options are not for everyone, and unlike some other brokerages, Robinhood does not allow short selling or uncovered options trading,” a spokesperson for the app said. common transactional usage said. “Over the past year and a half, we’ve enhanced the eligibility criteria for our options, added more educational content to options on the Learn website and directly in the app, improved show our preferences and recommend 24/7 live phone support through the app.”
1 million transactions per day
The rise in retail options trading activity is the most prominent in the so-called stock meme. Earlier this year, a group of retail merchants glued to online chat rooms managed to create big short squeeze in names like GameStop and AMC Entertainment by contributing to these shares and call preferences.
Cboe analyzed all client volume in the top 15 meme stocks across its four options exchanges by initial order size.
In January 2021, at the height of the meme stocks mania, options trades with order sizes from 1 to 10 reached over 1 million trades per day in the top 15 meme stocks and that number. continues to grow until the end of 2021. An options contract represents 100 shares of the underlying security.
The increased involvement of retail investors in options trading has attracted attention from regulators.
The financial industry regulator will publish a request for comment in the coming weeks, seeking details from exchanges and brokers about options trading and the risks involved, a spokeswoman said. told CNBC.
Finra said it is looking into whether changes to options rules can be warranted, including rules around options account approvals, custodial and margin requirements.
– by CNBC Nate Rattner contributed to this story.
