Pandemic-induced choices buying and selling exhibits no indicators of slowing

Traders work on the NYSE floor in New York.


Options trading is the new sports betting.

Talk about unintended consequences.

The stay-at-home requirement created by Covid-19 has spawned a huge sub-industry in options trading, along with an increase in stock trading that is showing no signs of subsiding.

Stock options trading hit new highs in November and continued a trend that began earlier in the year.

Trading in stock options on all option platforms is 50% above the previous year's level.

Stock options (volume)

  • Nasdaq 49%
  • CBOE 51%
  • ICE 58%

Source: Piper Sandler

"The public is welcoming options in a truly unprecedented way, as you can see from the volumes," said Steve Sosnick of Interactive Brokers. "I attribute part of the popularity of the lockdown … People were stuck at home, many with $ 1,200 checks or rental / credit moratoriums and no sports to watch or bet on. So they went public and stood then found that options exist similar payout structures to sports betting. "

This sports betting analogy is intentional: "The psychology (of sports betting versus betting on stocks) is very similar. I can make a certain percentage of the money on sports betting. The same goes for stocks and options, but stocks and options exist Thousands of bets to make every day and when you find yourself in an upscale market like we've seen you can believe the odds are really in your favor. "

Kyle Robinson, who tracks trading activity at Piper Sandler, noted that much of the trading activity has been in out-of-the-money options that are about to expire, with much of it being traded during the day: buying in the morning and get off the afternoon.

Why this type of activity? "They trade options because many don't have the money to buy many stocks," he told me. "You can buy options at a fraction of the price. When you have options that move the same percentage as the underlying stock, you can make money as if you owned the stock."

Sosnick noted that many day traders are far from acting irrationally in order to target option options trading.

"How else are you going to buy an Amazon or a Tesla? Purchase options make sense for people who want to participate in such trades."

Buying out money calls has a limited hassle so you can only lose what you put in. "You buy a call for a dollar, you can only lose a dollar." Speculating why many are doing simple day-to-day business, morning and end, Sosnick said, "They may be poorly capitalized. They may want to sleep at night. This may be the only strategy they know." . "

Also help the phenomenon of day trading: no commissions on many trades and the presence of social media and chat rooms full of discussions about high profile names.

Another important factor: the availability of educational materials that teach traders how to trade options.

"We haven't seen any decline in the interest in educational materials on our website," said JJ Kinahan, TD Ameritrade's chief market strategist. "The most viewed videos on our site are first, the basics of stocks, and second, getting started with options." He noted that the viewing of this material is three times what it was a year ago.

Stock trading has also increased significantly

The increase in options trading comes with a similar increase in stock trading. At Fidelity, for example, trading volume rose 97% year over year in the third quarter.

Interactive Brokers' daily average deals (DARTs) increased 174% year over year in November, according to Piper Sandler's Rich Repetto. They also added 29,000 new accounts.

"We are increasing our EPS estimate for Q4 20 due to stronger than expected trading, continued account growth and strong margin balancing, as well as customer capital growth," Repetto wrote in a recent statement to customers.

Robinson noted that he is not seeing the same dramatic increase in futures trading, which professionals use more as hedging tools or in index options.

How long will this increased trade last?

With all that bullish buying of calls, what could go wrong? Sosnick told me the biggest risk is simply the reverse: "You can get into a losing streak. It doesn't take much to buy risky calls to lose money after a few days or weeks."

Sosnick also speculated that trading on the day could have a finite shelf life regardless of market trends.

"I wonder how much of this has to do with the fact that a lot of people didn't have to pay student loans and may have to do so in the next month," he said. "The average student loan payment is $ 400. If you use that to get in the market and I have to start paying that back. It's money that could come out of the markets."

Robinson agreed. "We don't expect these levels to continue," said Robinson. "When the pandemic is over, those who stay at home will be back to work. If the vaccine comes out, volatility will likely decrease, making daily trading difficult."

Sosnick agreed that once the massive amount of call purchases had gone, volatility could actually decrease. He noted that one of the reasons the CBOE Volatility Index (VIX) stayed at the elevated 21 levels despite a major rally is because the large number of call buyers increased the implied volatility.

How many stay with the next correction?

The ultimate test to see if these new traders stick around will be the next fix, Sosnick told me. "People are smart and try to educate themselves. But the best training for traders is a full market cycle, and we haven't seen that. A lot of these traders didn't come until after March so they haven't seen a full cycle."

Still, Sosnick doesn't blame the younger crowd for having fun with stocks and options while it lasts: "And bets on NASDAQ paid off a lot sooner than the Jets," he quipped.

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