The Rise of the Retail Options Trader

In recent years, retail traders have emerged as a dominant force on the options market. Depending on the calculation criteria employed, estimations of retail’s overall share of the options market vary from 45% to 60%.

Retail participation surged during the pandemic but has remained elevated ever since. A new generation of retail traders is learning that options can be very useful for implementing their strategies. These include taking short-term directional positions around news and earnings announcements, and being able to access comparatively higher leverage while doing so.

In this article, we’ll explore the retail options trading phenomenon, its causes, the statistics, how trading platforms are evolving, and what features to look for in a modern options trading platform.

Why options?

Options as a financial instrument boast several features that have led to them being so attractive to retail investors. As mentioned above, the increased ability to leverage positions and trade around volatile short-term events are definitely selling points for retail traders. As are the abilities to use options to hedge existing investments, and to express directional market views without having to build positions in the underlying. 

As you can see, these features coincide with certain preferences that we tend to associate with retail trading: leverage, flexibility, and the ability to implement event-driven strategies. However, one of the most important factors in this revolution, which can probably be regarded as the tipping point in options popularity, is cost. 

The emergence of zero-commission brokers in the US changed the entire landscape of retail brokerage and led to trading becoming a mass market phenomenon and lifestyle product. It attracted new demographics, such as younger traders and women, who have traditionally been underrepresented in trading. 

When Robinhood, an app-based zero-commission brokerage aimed at younger investors, entered the market in 2015, it changed who retail brokers targeted their services to. A new wave of retail clients were converted with the promise of ease of access, simplicity, affordability, and a relatively low-cost way to learn how to trade. The word spread like wildfire, and the number of retail traders and zero-commission venues exploded.

By 2021, Robinhood reported that it had gained 21.3 million active monthly users. In the same year, retail options activity surged to 9.87 billion contracts, record highs which represented a 32.2% increase over the previous year. 

A 2021 survey by the Financial Industry Regulatory Authority (FINRA) reported that 38% of investors who registered for a brokerage account in 2020 did so for the first time. 22% of these first timers were 18-29 years of age, and 66% were under 45. A third of these fledgling investors started their respective trading journeys with less than $500 in their brokerage accounts.  

Short-term trading 

Another crucial part of the story of retail options is the advent of zero-days-to-expiration options (0DTE), which allow traders to speculate on intraday market action. 

Options give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price and time. The big difference with 0DTE options is that they expire on the very same day that they’re traded. The premiums that buyers pay for these options are cheap due to their short time horizons and the high likelihood that they’ll expire out-of-the-money. 

0DTE options were introduced back in 2005 by the CBOE (Chicago Board Options Exchange) but 0DTE trading was only available once per week. In 2022, 0DTE options were introduced for all five trading days of the week, and this coincides with the continued rise in the retail popularity of this instrument. 

Retail participation is more prevalent in shorter-dated options. Research published by the New York Stock Exchange at the end of 2023 showed that short-dated options were 51% retail at the time, while options expiring in one to three months were 34% retail, and options expiring in more than three months were 31% retail. Additionally, the research showed that 56% of all retail options volume was in options that expired in five days or less. From November 2019 to September 2023, short-term options as a percentage of the overall market tripled from 7.8% to 26.3%.

WallStreetBets as a catalyst 

The meme stock boom of 2021 is another big part of the retail options story we’ve been trying to unfold. It brought together a number of different phenomena that resulted in institutional short sellers receiving a bloody nose at the hands of young retail traders.

The combination of lockdowns, CARES act cheques, and Reddit as an online space for traders to communicate their intentions led to a flurry of coordinated market activity. Young options traders banded together to purchase deep out-of-the-money calls on seemingly hopeless stocks such as GameStop (GME), AMC Entertainment (AMC), and BlackBerry (BB).

The extent of the retail call-buying on these heavily shorted stocks forced hedge funds to purchase the underlying stocks in order to cover their positions, which led to the stocks rallying. This caused a vicious cycle of more short-covering activity that resulted in the underlying stocks surging even further. The result was the bankruptcy of several hedge funds, including Melvin Capital. The event led to a broader recognition among retail traders that they’re not just at the bottom of the liquidity food chain, but that they have the collective muscle to affect markets in their own way.  

Must-have options platform features 

The above has led many brokers to re-evaluate their options offerings and to attempt to cater for this new generation of traders who prefer options over other instruments. 

There are significant differences between options and other instruments such as stocks, currencies, or crypto. One of the first realizations that these trading businesses have made is that they need to offer platforms that are tailored to the unique features of this instrument, as well as to the younger demographics involved.

This last part is especially important because, as we saw with the WallStreetBets phenomenon, unlike previous generations of traders, this group is in constant communication with each other. They share their experiences of the platforms they use and are quick to make shortlists of the best and worst. The following is a list of requirements and features that all modern options platforms should be offering. 

Visualizations 

This holds true across the board, but especially so for complex instruments such as options. Well-designed visualizations boil down complicated arrays of data in an accessible way and help in the decision-making process. 

Heatmaps should be provided to show how tradable symbols are currently moving in relation to strike prices and expirations. 

Additionally, market depth visualizations help traders spot the price levels at which the bulk of liquidity is currently situated, as well as allowing them to view existing pending orders and open positions plotted against this visual data.

Earnings analyzers are also very useful tools as they demonstrate the correlation between earnings announcements and market moves. Since many retail options traders are highly news-driven, the ability to view these events on a dashboard accompanied by volatility data is highly valued.  

Risk management

Risk management tools in options trading are also very important and require more consideration on the part of developers. 

Options traders need access to the “Greeks,” a measure of an option’s sensitivity to various market factors such as change in the underlying security’s market price (delta), the rate of that change (gamma), time (theta), implied volatility (vega), and interest rate changes (rho).

Additionally, “what-if” analysis tools provide traders with an estimation of potential profit and loss on both current and demo strategies. This allows them to make decisions that are better informed and lets them tweak their respective strategies in a safe environment before deploying them.

Decision-making assistance

In order to aid traders with narrowing down all the possible trades they might make at any given moment, a capable stock and options screener is recommended. Screeners allow traders to narrow down the underlying assets they may want to initiate trades on by scanning for various characteristics that coincide with their strategies. These can include fundamentals such as earnings data, and technical performance, as in the case of price action performance in relation to moving averages, or other technical indicators of choice.

Option chains provide lists of tradable options on underlying assets that can be filtered by strategy. These tools also allow traders to simulate theoretical positions and perform risk analysis on them before taking the leap with real capital.

Finally, owing to the complexity of options strategies, many users appreciate platforms that present all available strategies, such as straddles and spreads, with supplementary information detailing what they entail, what they’re normally used for, and what the potential benefits and risks are. In this way end traders can be helped to deal with the learning curve involved in trading options.

Mobile and web-based platforms

As with all instruments nowadays, the ability to access the platform via a variety of devices and operating systems is very important. Dedicated mobile apps that can offer the same experience as the main desktop version are highly valued by younger traders, who spend most of their time on mobile devices.

Also, a solid web-based version of the platform that can be accessed via any browser is important as it adds an extra level of convenience and flexibility for those not wishing to install software on their machines. 

Conclusion 

The adoption of options trading by retail investors reveals how far they have evolved, how sophisticated they are becoming, and how they are learning to crowd-source their trading education. As this article has shown, they are not only participating in options markets, they are dominating them with their volumes. 

Brokers seeking to capitalize on this upsurge of options interest can differentiate themselves by offering an options platform that’s tailored to retail traders and improves the experience of trading this exciting instrument.

To find out more about our own options trading platform and how it can be customized to serve your own business needs, please reach out to our team.