Options are now popular among typical retail investors. These financial instruments, which effectively allow you the right, but not the responsibility, to purchase or sell an asset at a specified price before to or on an expiry date, were previously only available to experienced traders. Everyone now looks to want a piece of the action and a fast buck off of share price movement without having to pay the entire cost of purchasing business shares.
- So far this year, daily options trading activity has reached record highs.
- Because of better accessibility, cheaper commission costs, and rising understanding of the advantages options provide, retail investors are getting in on the action.
- Some experts have predicted that increased participation in the options market would result in larger fluctuations in the stock market.
Record Year for Options Trading
Cboe Global Markets believes that 2021 will be a watershed year for these derivative contracts. According to data from the Chicago Board Options Exchange and BATS Global Markets, nine of the ten most busy call options trading days in history have happened this year.
These results, which were published in the Wall Street Journal, are supported by data from the Options Clearing Corporation, which discovered that a record 39 million options contracts changed hands on an average day this year. This marks a 31% increase over 2020 and the biggest amount ever reported since exchange-traded options were initially traded in 1973.
Options trading has become so popular that the current market value of these contracts has overtaken that of equities. According to the Wall Street Journal, Cboe stated that single stock options with a notional value of around $6.9 trillion have changed hands so far this month, up to September 22.
Big tech firms like Apple Inc. (AAPL) and Tesla Inc. (TSLA) are among the equities that have piqued the attention of options traders. According to a Wall Street Journal study, Apple options with a notional value of more than $20 billion have changed hands every day this year, compared to around $12 billion in the iPhone maker’s shares. Tesla has seen an increase in activity. Approximately $80 billion in options on the electric automaker are said to have changed hands daily in 2021, representing over triple the sum traded in its shares.
Why Are Options Now So Popular?
The increasing popularity of options among retail investors may be attributed to increased accessibility and understanding of the advantages they provide. These products let investors to essentially gamble on the future price direction of equities for a significantly lower investment. To obtain the option to subsequently purchase or sell shares in a firm at a predetermined price, they just need to pay a premium to the other party in the deal. They may even sell the investment to another investor for a fast profit and only lose the premium paid if things go wrong.
Online brokerages now allow access to the options markets without incurring exorbitant charges. This, along with an increasing number of exchange-traded funds (ETFs) and mutual funds that use options-related methods to boost portfolio returns, has helped to propel this sort of trading into the mainstream.
Side Effects of Increased Options Trading
While it is difficult to argue against the benefits that options may give to prudent investors, there are increasing fears that the current surge in activity may cause issues. One prevalent concern is that options encourage short-termism and more volatility in stock markets.
The Wall Street Journal reported in its story that the quick spike in Gamestop Corp.’s (GME) share price was caused in part by the sale of a large number of call options on the shares. In general, when investors pay for the right to purchase shares at a predetermined price at a later date, the sellers of these options will buy to hedge their position, helping to rising markets. The same is true for downturns. If a large number of investors begin to purchase bearish put options, the share price of the firm may fall further.
Another major fear is that recent success stories concerning option investments may encourage others to enter the derivatives market without fully comprehending the terms and ramifications. The options are clear in nature. However, before investing, it is important to comprehend them and be aware that they, like any other investment product, may result in losses.
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