Retail Traders Adopt Options En Masse

2020 has been a crazy roller coaster ride; just when we felt like it was about to end, we're now finding out that there are a few more curves left this ride.

Will things ever be the same again? Perhaps not: People are looking at office spaces, in-person collaboration, working hours, and communication habits differently due to the pandemic. One of the most significant hallmarks of 2020 is the massive adoption of retail options trading and its place in the mainstream. Although options trading has been an instrument mainly for the advanced trader for a long time, 2020 has made it a popular product with mass retail market appeal.

To understand this phenomenon, let us look at the following statistic: During the week of Thanksgiving in 2019, customers executed 58.5M options contracts, according to the OCC. During Thanksgiving 2020, they pumped in 131.5M Options contracts. This volume number is almost a 125% increase in customer options volume. Since 2019, Tradier Options based API calls have seen a 400% increase and over 100 plus new Options Trading platforms have been launched.

A lot of analysis has been written on why options are exploding. The following are, in my opinion, some of the main reasons for the rise in retail options trading:

Graduating effect: Starting in 2015, we saw many young, first-time investors enter the self-directed retail markets. Most began with a sole focus on stock trading. Today, these investors have graduated in terms of their maturity and understanding of their needs and are comfortable using a more sophisticated instrument like options.

Better education: Educators have been the hidden force behind driving this option-centric trend. Hundreds of credible educators offer superb mentoring, education, and content today to retail investors. Also, free online education, real-time trading rooms, and YouTube “How to” videos have become popular avenues for this new breed of options traders and investors to learn, analyze, and develop options strategies. I spoke to our top 10 educators partners and they report that they have seen a massive increase in their course subscriptions. Educators and communities like OptionsAnimal, BubbaTrading, TopGun, SteadyOptions, OptionsAlpha, TradePartner and others have played a significant role in increasing options adoptions.

Better tools: The age of vertical trading applications from legacy brokers is fast collapsing. For a long time, there were two extremes of legacy broker tools in the market. The choice was either the complicated and expensive trading platforms like Thinkorswim or OptionsExpress, or easy entry mobile apps. In 2017, a fundamental shift occurred. We saw the introduction of great customizable technology platforms like TradeHawk, StockCharts ACP, Orion, OneOptions, OptionNet Explorer, Harvested, OptionsAnimal, and many other great offerings. These platforms offer low cost and flexibility to retail investors and combine them with great content and education. We has seen a massive demand for advanced functionality and data API’s like OCO, OTO, OptionsGreeks, Unusual Activity, PaperTrading, Strategy Based P&L and other advanced features.

Lower costs: Commissions have substantially come down, and the market has created several custom plans and offerings to meet needs of active traders. 

Stay at home investor: Driven by the uncertainty of the pandemic, economic conditions, and the elections, retail investors are more sensitive to market-moving news that could affect their portfolios. In the past, portfolio rebalancing typically occurs every quarter. These days, investors are more reactive, and some have opted to rebalance weekly, and in extreme conditions, daily.

Hypersensitive investor: Driven by the uncertainty of the pandemic and the elections, retail traders and investors have found themselves in a never-ending loop of super sensitivity to every piece of market news. Every newsworthy story causes an instant reaction from active traders, which adds to this growing volume.

Uncertainties among legacy brokers: The acquisitions of TD Ameritrade and E*trade created and an uncertainty in the market that made many active traders look for other options trading venues. For example, trading platform TradeHawk enjoyed a 300% increase in new users in 2020, mostly from accounts from ThinkorSwim, IB and E*Trade.

Simplified experiences: A decade ago, options trading platforms were dense, thick, and complicated. Retail platforms have greatly simplified the look in the last few years. Many independent third-party platforms powered by Brokerage API’s have launched simpler trading experiences than offerings by legacy brokers. 2020 saw the launch of hundreds of independent third-party options trading platforms.

Volatility: 2020 has seen some of the most volatile markets in the last decade. Active traders see options as a viable instrument to manage risk and volatility. Extreme volatility combined with a more equipped and educated options trader has caused retail options volume to skyrocket.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Dan Raju

Dan Raju is the Chief Executive Officer and Co-Founder of Tradier. Dan has the overall responsibility of Tradier and the company’s strategy and direction.

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