Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy
prior to making financial decisions.
Across the board, options trading volume has increased almost as much as stock trading. For beginners, options represent a more intimidating investment venture. However, for veteran daily stock traders, they have their own unique benefits.
Options Trading Catches Stocks in Hype
Stock-trading is not the only emerging hobby in place of closed sports bars and casinos. Although Bitcoin is trending as the most profitable investment of 2020, compared to stocks, it is not as dynamic to be exciting. To fill in that gap, the next big thing seems to be options trading—according to activity from millennials.
More specifically, equity options trading has witnessed a notable surge. In a short time, public participation has grown off the charts. Across three US-based exchanged, equity options volume has gone up by 50% compared to the same period last year:
- ICE increased by 58%
- CBOE saw an uptick of 51%
- Nasdaq boosted by 49%
With the stimulus deal finally settled at $600 direct checks, should you use some of that money on options? Given that options trading with top brokers allows for a greater degree of flexibility and educated guesswork on stock price heading, they are not recommended for beginners.
The Allure of Options
Nonetheless, their flexibility also means you don’t have to spend as much as you would on many blue-chip stocks, such as Amazon, Apple, or Berkshire Hathaway. This is why out-of-money options have become a favorite among the newly-minted options day traders. As with daily trading stocks, out-of-money options are mostly bought in the morning and dumped in the afternoon.
There are many differences between options and stocks, as options can provide a profit for a fraction of a stock’s price. However, this only applies to options moving the same percent as the aligned stock. Moreover, with out-of-money options calls, you can only lose as much as you put in. Just like with sports betting.
On top of the betting excitement for smaller sums of money, and millions of idle hands during lockdowns, there is another major reason why options trading has risen so rapidly this year. Practically all of the top options trading platforms have removed commissions and fees for most trades.
Not All Options Are Traded Equally
Fidelity reported a 97% increase in equity options trading for Q3 2020. Likewise, Interactive Brokers reported a 174% daily average revenue trades (DARTs) increase in equity options for Q4 2020. In short, the only type of options that have not seen a drastic volume rise are futures and index options, although the vaccine deployment did boost futures.
Considering that both of those options are delegated to being financial hedging instruments, such a lack of interest within the novice class of investors is understandable. Moving forward, the Fed already indicated there will be large relief injections ahead, which will keep the market steady. At the same time, it will encourage further experimentation in the derivatives market.
As you get more engrossed in the world of high finance, which trading platform provides you with the most useful educational material? Let us know in the comments below.