Amateur Day Traders Fuel an Options Boom

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In the past few years, the volume of options trading, especially short-dated deals, has skyrocketed, The Wall Street Journal reported. A lot of that is thanks to amateur investors lured by new trading apps that eschew an investment mindset and encourage users to think of financial markets as casinos.

Place Your Bets

The rise of day trading apps like Robinhood and Webull has a lot of people thinking they’re just doing what Wall Street professionals do. “We should stop pretending that what’s going on is investing,” Benjamin Edwards of the University of Nevada in Las Vegas told the WSJ. “It’s just gambling.”

Options can be risky, especially if you’re on the wrong side of a complex bet that risks more than just your “premium” and opens up the possibility of unlimited losses. However, the risk and increasingly shorter terms to elicit boom or bust are playing out as a feature, not a bug:

  • Deals that expire in five days or fewer account for nearly half of all options trades as of August, up from one-third just three years ago, according to data from SpotGamma.
  • Figures from Options Clearing House found that about 44 million options contracts have changed hands every day this year, more than double the amount in 2018.

Know When to Walk Away: While it’s possible to make bank buying options, you’re more likely to break it, and the losses can happen before you know it. One Robinhood user told the WSJ he woke up one morning, bought options for $3,000 and after taking a shower, they had fallen nearly 100% in value to just $80 (it’s why we never shower at The Daily Upside). A study from the London Business School found that between November 2019 and June 2021, individual options investors lost more than $2 billion. It’s the options sellers who generally profit. House always wins.