Options trading volumes are bigger than ever. Here's why.
Today investor interest in options trading is reaching all-time highs with index options and equity options volumes contributing to this growth. This continued expansion comes on the heels of Cboe, the options exchange that launched options trading and celebrated their 50th birthday earlier this year. Cboe is also our collaborator for our recently launched index options trading.
As we close out another potentially record-breaking year for options trading, we wanted to explore what has contributed to the increasing popularity and expansion of options.
Read on to learn five factors driving this growth.
What is an option?
Before jumping into these factors, let’s step back and define options.
Options give the owner the right, but not the obligation, to buy or sell an underlying asset at a certain price (the strike price) for a specific period of time (until expiration or expiration date). The contract also obligates the writer (the seller) to meet the terms of delivery if the owner (buyer) exercises the contract right.
Two common option types, equity options and index options, are contributing to today’s growth in options trading volumes. Equity options and Index options are contracts that give the holder (investor) the right, but not the obligation, to either buy or sell an asset at a set strike price on or prior to the contract’s expiration date. Equity and index options include calls and put options.
These two options have their differences but here we’ll note their different underlying assets: equity options have equities (stocks) while index options have a benchmark index, such as the Cboe S&P 500 Index options (SPX®), with the S&P 500 as its underlying.
Five Factors Driving Growth in Options Trading
With options trading volume growing yearly, market participants can enjoy more tools, products, competition, and more. These have contributed to growing volumes and participants. But let’s dig deeper.
Risk management: Hedging strategies may help
One of the many benefits of trading options is they can help manage risk; this can be done using hedging strategies. When you’re hedging an option, this can mean opening an options position – or sometimes multiple positions – to help offset risk to an existing trade that you have in your portfolio.
Hedging strategies can minimize the effects of temporary declines in asset prices.
For example, if you're looking to hedge a long stock position, you could purchase a put option or create a collar for that particular stock. A collar is a strategy that includes a long stock (the stock you own), selling an out-of-the-money (OTM) call option, and a buying an OTM put option; the call and put have the same expiration.
While this strategy can be effective when you own a single stock, if you’re trying to reduce risk across an entire portfolio, this could prove to be more challenging from the diversity of various asset classes and position sizes. This is where index options may be helpful as a hedging strategy for a diversified portfolio with its vast selection of strikes, contract sizes, and expiration dates.
More options products: More data, more potential opportunities
When trading options, investors have options.
With an equity option’s underlying assets based on a single company’s stock, there’s a wide world of optionable stocks, which are stocks that have listed options on them, available for trading. This number comes in around 6,000 stocks.
But there’s more.
Today, market makers can give quotes to around 1.5 million options vs. approximately 10,000 stocks.2 With this number, the options market produces a majority of the overall market data.
Investors also have choices on what they want to trade as options can have underlying assets of stocks, ETFs, and indexes. Once they pick their asset of choice, they can now decide on other “options” such as different frequencies (a lot or less theta/time decay) or different settlements (physical or cash)1. But not all options will have these varying choices as more liquid ones can present more choices.
Greater competition: Expansion of options exchanges, more choices
And if there aren’t enough choices for options trading, let’s talk about the number of options exchanges.
Beginning with Cboe’s 1973 launch of 16 unique stocks to introduce options trading, in 1987 four additional exchanges opened their doors and total options trading volume swelled to 305.2 million contracts that year—representing a 280-fold jump in 14 years.2 Today, there are 17 options exchanges, including Nasdaq, Cboe, and the New York Stock Exchange, with no. 18 in the works: the MIAX Sapphire Options exchange expected to launch in the first half of 20243.
As the number of exchanges and online trading platforms continues to rise, so does the level of competition. And this can lead to benefits such as more reliable or faster trade executions, lower transaction costs, price improvements, commission-free trading, greater transparency into the market, and greater liquidity for displayed quotes.
A wealth of education: Growing the investor base
Knowledge is power and options education is plentiful.
Retail investors have jumped on the expanding bandwagon of options trading whether it’s from the pandemic, accessible online platforms, or options education. Many are new to options trading, with 20% having less than two years of experience, according to FINRA.
Many options exchanges and online trading platforms offer free education to investors. Whether it’s webinars, online courses, community discussions or livestreams, these options venues recognize that expanding your education isn’t one-size-fits-all but instead many offerings enable investors to create their own options education journey.
The best part? Most of this education is offered for free.
The 30+-year-old Options Industry Council, which has the support and participation of the U.S. listed options exchanges, is an industry organization that provides free education.
Many online trading platforms also provide education for investors of all levels, with some offering paper trading to learn more about options trading. This can enable investors to dip their toes into trading or trying new strategies before committing their own money — and educate themselves along the way.
Innovation: Introduction of new option products (0DTE)
While options exchanges are expanding, so is the universe of option products.
The options market is constantly innovating. One popular product is zero days to expiration (0DTE); however, a closer look shows they’ve been around for a while.
In 2005, Cboe launched weekly options, which enable investors to trade 0DTE weekly options, once a week. In 2016, the exchange added Monday and Tuesday 0DTE options and by 2022, 0DTE options on the SPX had been added, making these options available for trading five days a week.
Retail traders are actively trading 0DTE options as Cboe reported in August 2023 they make up almost 40 percent of the volume in 0DTE options4. But we can’t forget index options.
In the last year, 0DTE options on equity indexes have also taken off. According to JPMorgan, these options have continuously achieved record levels and in the fall of 2023, accounted for 50% of all SPX® trading volume5. This product enables investors to trade on intraday stock market action by buying or selling the S&P 500 short.
What’s next? Market participants may be keeping their eyes on the recent launch of ETF zero-day options.
But keep in mind: Opening new options positions close to or on their expiration date comes with substantial risk of losses for reasons that include potential volatility of the underlying security and limited time to expiration. 0DTE options are not suitable for all investors and should be utilized only by sophisticated investors who understand the essentials of options and the risks of 0DTE options.
How moomoo can help you along in your options trading journey?
With the growing popularity in equity and index options trading, now may be a good time to consider learning more about options in 2024. From novice traders to more experienced ones, investors may find using options can help them meet their investment goals.
Here’s how moomoo can help you learn more:
Education
Options tools and products
Community
Sources
1. https://www.nasdaq.com/articles/whats-driving-the-growth-in-options-trading
2. https://www.investors.com/research/options/options-trading-today-after-50-years-of- growth/
4. https://www.bloomberg.com/news/articles/2023-08-24/retail-traders-are-driving-up- to-40-of-zero-day-options-boom?embedded-checkout=true
5. https://www.ft.com/content/312e9b3c-a5e0-4eff-8b9a-8637696d2f6f
Disclosures
Options trading entails significant risk and is not appropriate for all customers. It is important that investors read Characteristics and Risks of Standardized Options (https://j.us.moomoo.com/00xBBz) before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount. Supporting documentation for any claims, if applicable, will be furnished upon request.
Moomoo does not guarantee favorable investment outcomes. The past performance of a security or financial product does not guarantee future results or returns. Customers should consider their investment objectives and risks carefully before investing in options. Because of the importance of tax considerations to all options transactions, the customer considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy.
Exchange traded Index options are similar to exchange traded equity options in that all options involve risk and are not suitable for all investors. For a better understanding of the differences between index options and equity option please visit the resources available through the OCC’s Options Industry Council here: Equity versus Index Options.
This article is for educational use only and is not a recommendation of any particular investment strategy. Content is general in nature, strictly for educational purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. All investing involves risks.
Moomoo is a financial information and trading app offered by Moomoo Technologies Inc. In the U.S., investment products and services on Moomoo are offered by Moomoo Financial Inc., Member FINRA/SIPC.