2024 Options Outlook

January 17, 2024 — 09:00 am EST

Once regarded as exclusive to institutional investors, options trading has witnessed a remarkable surge in popularity amongst the investing public. But what factors are fueling this growth, and what can we expect in 2024?

Nasdaq’s Sean Feeney, Head of U.S. Options, and Josh Bruckstein, Senior Specialist, Nasdaq Options Products, joined forces to provide a 2024 outlook on the options industry and explain how firms can prepare for significant changes, such as the upcoming OPRA real-time data feed expansion.

Options Growth and Retail Participation: Continued opportunity for growth

Over the past decade, we’ve witnessed double-digit compounding annual growth in options average daily volumes (ADV). However, the onset of the COVID-19 pandemic in 2020 marked a notable surge in ADV, signifying a substantial 51% increase compared to 2019. Options volume has continued to increase YOY since 2020.

Factors contributing to this growth include:

Expanded access to high-quality data and trading tools for retail investors.
Commission-free retail trading.
Retail mergers.
The speed of information delivery via social media.
Electronic trading & execution quality competition.
Volatility in markets driven by macroeconomic & geopolitical events.
Stock splits.
Non-standard expiry listings.

While retail participation has decreased from its peak during the pandemic, Feeney pointed out that the introduction of new exchanges, the availability of more options products, and eagerness from investors to participate are ongoing factors fueling this growth into 2024: “We have an opportunity for a significant uptick given a range of factors. It really depends upon the overall volatility of the market as well as the velocity of that volatility.”

Chart 1: Over 24 years, we can see a large uptick in volume starting in 2020.

Source: OCC Data. As of October 2023.

Short-Dated Options Growth: Continuity of product lays a foundation for more market liquidity

On expiration days, around 40% of volume traded in highly liquid single stock options is in the expiring series – a trend that has been intact for years. Retail participants tend to be net buyers of options, while institutional participants, including liquidity providers, tend to be net sellers and often seek opportunities during market dislocations, focusing on the overall volatility profile of instruments.

Is this an issue? Feeney says that when we balance things out, the market doesn’t see large positions in these shorter-dated options towards expiry. Additionally, there aren’t indications of additional systemic risk due to increased trading in short-term instruments.

Chart 2: There aren’t indications of additional systemic risk due to increased trading in short-term instruments.

Source: OCC Data, Nasdaq Economic Research

While shorter-dated options trading is certainly not a new phenomenon, Feeney believes the recent growth is a direct result of additional product adds within asset classes, like NDX/QQQ and SPX/SPY: “It’s all about continuity of product. Originally, options were expiring on the third Friday of every month, then around 2012, we started to see more weekly options being listed. Naturally, as product is added, we see additional liquidity in these new instruments.”

Retail Tools and Data: Retail brokerages spearheading investor education

Increased retail participation is being accompanied by a rise in user-friendly investing platforms offering high-quality data and tools. Retail brokerages play a pivotal role in advancing investor education, particularly in understanding the risks associated with derivative instruments and aligning investment objectives into their portfolios. More platforms are expected to fuel market participation by making options education, data, and investing tools to manage portfolios readily accessible.

Feeney reflects on the industry’s transformation since his early days on the options trading floor: “Back in the late 90s and 2000s, the technology available to professional traders was fairly robust, but not as robust as the tools available to retail traders today. Now, people can granularly pick apart their portfolios, see what their risks are, and hedge those risks effectively.”

The OPRA Expansion: Increased bandwidth requirements to put pressure on some firms

Slated for February 5, 2024, the Options Price Reporting Authority (OPRA) is set to double its pricing information channels for its real-time options data feed from 48 to 96 lines.

With the most recent OPRA bandwidth projections estimating 12 million messages across the 48 channels leading up to the change on February 5^th, Bruckstein underscores the potential challenge for many firms in managing the increased volume of data: “The OPRA change essentially doubles the headroom. It’s more capacity to accommodate additional message traffic, which is going to require more bandwidth.”

Chart 3: OPRA data peak message rates per second have increased 70%+ since Q4 2020.

OPRA Peak Message Rates

Source: OPRA Data

Instead of relying on data center connectivity, which can be sparse and costly, there’s an alternative that offers a more streamlined approach to data delivery than traditional hardware and infrastructure – Nasdaq Smart Options. Created to reduce firms’ operating costs, the Nasdaq Smart Options data feed is designed to provide a cost-efficient, low-bandwidth method to consume the OPRA data feed by only delivering the necessary data points that firms require for options trading. It’s all delivered via an options data API.

Bruckstein puts it simply: “Instead of consuming the entire feed, Smart Options supplies what many customers consider the most valuable information.” The feed provides only the critical national best bid and offer, trade data, and administrative messages, removing additional noise. Thus, firms can capitalize on cost savings from needing an average of 80% less bandwidth than required to consume the entire OPRA feed.