I find this recent report from CNBC.com very interesting. It pushes me to think and write more on options. “Options trading is the new sports betting” as the report says. “Equity option trading is 50% above last year’s levels year to date on all the options platforms.” The volumetric numbers are crystal clear from Piper Sandler: On Nasdaq equity options are 49% of the total volume, 51% in CBOE (Chicago Board Options Exchange) and 58% on ICE (Intercontinental Exchange). Steve Sosnick of Interactive Brokers tries to make sense of this new rush in trading options: “People were stuck at home, many with $1,200 checks or rent/loan moratoria and no sports to watch or bet on. So they went to the stock market, then realized that options have similar payoff structures to sports bets.”
Options & term life insurance
Instead of sports, I want to compare option trading with term life or even universal life insurance policies. With term life insurance, the policies cover only a fixed term of life like 5, 10, 20, 25 or 30 years or anything shorter than whole life. Most importantly, term life policies are significantly cheaper than permanent life policies. It’s possible for example to have a mortgage protection insurance policy, a type of term life insurance, for under $20 a month. This aspect of term life matches the small amount of funds needed to invest in options.
The other analogy is universal life policies that do cover your life permanently but allow ordinary people to save and to own life insurance without constantly secured funds over lifetime. With a universal life insurance, one does not have to have the same amount to pay premium month after month and year after year. Instead, one can choose to pay variable amounts, depending on available income and financial needs.
At the first glance, universal life insurance does not bear similarities with options, but it is the “pay as you may” feature that links the two. The above CNBC report for example cited that “much of the trading activity has occurred in out-of-the-money options that are approaching expiration, with much of it day trading: buying in the morning and getting out in the afternoon.” The simple reason behind, as the report correctly points out, is that many option traders, at least many trading on platforms like Robinhood, do not have the money to get into trading activities that last longer than a day.
The entrepreneurs behind option trading
Speaking of Robinhood, it should be pointed out that the new rush in option trading is not entirely due to the pandemic. An important part of credit should go to entrepreneurs. Robinhood is one of the innovations that help make option trading grow and thrive. Commission free trading is just one feature, which is quickly copied and pasted by others as pointed out by this review of Investopedia. Mobile-first brokerage experience is perhaps even more important in its brand power, especially “with young, tech savvy investors thanks to a clean design and user experience that focuses on the basics.” But the most important contribution Robinhood made was to let young people know it is feasible to invest in a DIY fashion. That is awakening and renaissance.
There are a couple of olive trees in CKC and this morning I noticed several black olive fruits smeared on the sidewalk when I walked by and decided to put two olives in my mouth — for the first time in my life. They were bitter and somehow made my tongue heavy. But I have no regret of trying them. I would have never known how a naturally grown olive tastes without putting one in my mouth.
The same goes to Robinhood investors. I sincerely hope these young investors learned something from their experience of buying calls and puts using their smartphones with small amounts of no more than $10 at a time. After all, it is not that we have too many Americans who made their first investment moves in their 20s and 30s. No, it is the opposite that is true. But it does not have to be the case. The best way of learning option trading is doing it. Trading strategies sound complicated to even talk about, but perhaps only to bystanders watching other people doing it — not when one actually uses his/her fingers to enter say $3.25 to buy a call or put for an underlying stock s/he is interested in.
Will the trend sustain? I am cautiously optimistic. In sports, what is most difficult is to get people to the first game, after that some may feel they “need” or have to attend other games to follow up, especially those who had positive experiences. They may find entering financial market as an investor is more rewarding than sitting and watching games on the TV.