How Retail Traders are Changing Options Markets
Option trading is big business, and if volume statistics over the past few years are anything to go by, this big business is getting bigger by the year. The Option Clearing Corporation’s 2024 Annual Report showed that options traders broke records in 2024, trading over 12 million contracts.
In fact, options trading volumes have continued to grow every year since 2020, and they’re on track to break records again. Just halfway into June at the time of writing, 6 million contracts have already been traded so far in 2025. You can view updated options volume information on a daily, monthly, or annual basis.
So, why is this complex financial instrument, traditionally the domain of professional traders, so popular with retail market participants nowadays? And what impact is retail participation having on options markets?
How we got here
Below we’ll look at some notable shifts in recent years that have laid the groundwork for increased retail involvement in options markets.
Commission-free trading
In 2013, Robinhood, a trading app targeting Millennial traders, emerged on the retail trading scene and upset the apple cart by offering zero-commission trades.
By the end of 2019, the rest of the industry had pivoted towards this commission model. Big name incumbents such as Charles Schwab, Fidelity, and TD Ameritrade were all forced to cut their own commissions in order to preserve their own competitiveness.
Trading education
Trading education used to be something conducted by brokers as part of their marketing efforts. The rise of platforms like YouTube, Reddit, and Discord led to a new generation of financial educators sharing their knowledge on everything from how to read charts and order books, to risk management strategies in futures and options trading.
The speed at which these platforms have managed to educate an entire generation of traders cannot be overlooked. In many ways they succeeded in doing what retail brokers and other financial services players struggled for decades to achieve. They helped to create and activate a whole new demographic of educated traders keen on testing their knowledge on the markets.
Social media coordination
The above phenomenon naturally led to this new generation of traders being able to coordinate with each other via social media platforms. Retail traders have always been limited in the ways in which they can affect underlying markets, owing to the relatively meagre size of their positions when compared to those of institutional traders.
Using social media to coordinate their activities, retail traders were able to act in unison during the pandemic, driving up the price of doomed stocks such as GameStop and AMC by purchasing deep out-of-the money call options. These retail traders forced institutional players, who’d been nakedly shorting the same stocks, to shell out massive sums of money in order to cover their short options trades as the price of the underlying stocks rose.
Incidentally, this wasn’t the first time that retail traders had affected underlying markets with their activities, it was just the first time that options had been used collectively in such an ingenious way. Decades earlier, what’s now known as the “Mrs. Watanabe effect” was observed when Japanese matriarchs traded currencies en masse and affected the global forex markets with their own activities.
Zero-day-to-expiration options (0DTE)
0DTE options have been an on-going part of the retail options trading phenomenon, with many regarding these short-term options as having fueled the speculative behavior of retail traders.
Of course, it has always been possible to trade options on their expiry day, but in the past the number of these days were limited. This is because options were previously only available on a limited number of stocks and initially expired just once a quarter, followed later by just once a month.
In 2005, the CBOE (Chicago Board Options Exchange) introduced weekly options on SPY (SPDR S&P 500 ETF Trust) that expired on Friday, effectively allowing 0DTE trading to take place once per week. Then, in 2022, it added daily expirations for these options, effectively making 0DTE options trading possible on every day of the week.
According to the CBOE, 0DTE options now account for around 43% of average daily volumes. Retail participants have been shown to greatly favor shorter-dated options. According to the New York Stock Exchange, retail accounted for around 51% of short-dated options trading at the time of its study (2023).
Increasing risk appetite
The fact that retail traders tend to demonstrate a higher tolerance to risk than institutional participants is a phenomenon that’s been observed for many years. However, increased risk appetites among this group also appears to be linked to generational factors. In other words, younger members of this already highly risk tolerant group are demonstrating an even higher appetite for risk.
This is borne out by survey research, with roughly 53% of Gen-Z and Millennial respondents stating that they trade at least once per month. By comparison, only 35% of Gen-X and 19% of Baby Boomers trade as frequently.
Younger traders are also more active in their trading habits, with older generations preferring passive investment strategies. According to Survey Monkey, 24% of Gen-Z and 26% of Millennials day trade individual equities, while only 15% of Gen-X and 7% of Boomers favor this style of trading.
Some of the above can be attributed to younger people being more comfortable with risky behavior. However, part of this story undoubtedly has to do with generations that feel they’re behind where their parents and grandparents were at their respective ages when it comes to the accumulation of wealth. Let’s not forget that the prospects of these younger cohorts were severely impacted by the 2008 financial crisis, the pandemic, and post-pandemic inflation.
Impact on options markets
How is this increased tolerance for risk, knowledge of complex instruments like options, and appetite for trading among retail participants affecting underlying options markets?
More liquid
One of the great boons of retail participation in options markets is the increased liquidity this participation has contributed to. This is particularly so in the case of the short-dated options that are favored by retail options traders.
More traders also means improved price discovery and tighter spreads. As we’ll see below, though, increased retail activity also provides professional participants with opportunities to take advantage of the unsophisticated nature of much of this activity.
More volatile
Increased retail participation has also led to increased volatility. Retail participants are a world unto themselves, with their own strategies, risk management styles, and reasons for trading.
The presence of this group, and the counter-intuitive manner it sometimes likes to approach these markets has added a new wrinkle to the trading of options. Institutional participants can no longer ignore this changing market as ever higher percentages of daily volumes come to be accounted for by retail activity.
More idiosyncratic
On the other hand, retail traders have also known to be herd-like in their behavior. The coordinated trading we saw during the pandemic may have caught Wall Street off guard, but this doesn’t necessarily mean that retail participants will always enjoy these advantages.
In fact, it can often be quite the opposite. For instance, it was recently shown that retail traders have been setting their automated options strategies to enter and adjust positions at predictable times of the day.
Volumes on 0DTE options tend to spike at 10 am, then again at 10:30 am, 11am, and 2pm. This pattern has been showing up on SPX options for around a year but only shows up when viewing data pertaining to trades of 10 lots or less (typical of smaller retail accounts).
This isn’t the type of coordinated behavior we saw during the pandemic, but rather, unsophisticated traders unthinkingly using round minutes to set their strategies. This shows the predictability of retail behavior, which can be taken advantage of by sophisticated market participants with access to this kind of information.
Challenges and opportunities for institutions
For larger market participants, retail participation, as seen above, is a double-edged sword. On the one hand, retail activity has increased noise in options markets, forcing institutions to go beyond their traditional quantitative models used to predict price activity. On the other hand, the unsophisticated nature of retail activity offers new opportunities for institutional traders who have an undoubted informational advantage over individual traders.
Final thoughts
Going forward, institutions, be they hedge funds or brokers, will be called to better understand and anticipate the activities of this growing force in options markets. Sentiment analysis is becoming more important for taking the temperature of such a diverse group of market participants, that nevertheless can often engage in herd-like behavior.
Options trading platforms capable of providing in-depth analytics of client activity and trading behavior are crucial to having a clearer view of how different traders can be grouped. This view of client activity can be crucial to the profitability of brokers, but also be extremely valuable in their client retention efforts.
To find out more about the technologies we have available for options brokers, please get in touch with us.