Options have gained traction this year.

According to Barrons, options volume has exploded. “Daily volume in single-stock options averaged 17.3 million contracts during 2020, up 68% from the 10.3 million daily average for 2019. Trading picked up late in the year, with December single-stock option volume averaging a record 23.4 million contracts a day, according to data compiled by Cboe Global Markets, a leading options exchange.” It is unclear what may have caused this surge in options, but Barrons assumes it is the retail investor, trying to hit lotto tickets. I, however, do attribute that the surge in optician volumes may have been caused by retail investors, but I think that it is not all of them. As we know the stock market has been on a very good run, and as institutions that are long stock become overweight stocks and have to take out protection. Likewise, firms trying to take advantage of the move up in almost every stock in the market this year, took advantage of options getting more bang for their buck.

An example from business insider:

A massive trade was reported by Business Insider as the report said that “Susquehanna's co-head of derivatives strategy said the maximum value of the contracts could be worth $136 million” This massive trade was a bet on the S&P 500 through the SPY ETF. It was done in three main trades. 25,000 of the Dec expiring 448-470 calls for $7.91, 32,000 of the November expiring 448/460 calls for $4.35, adn fininaly, 43,000 of the 442-452 calls for 3.89. These massive spreads show the power of options and how you can grow your money in multiples that would simply not be possible with stocks. A 7% move in the S&P from that say would allow for returns of 272%. Meaning that the same 50 million, if just put into regular stock of the S&P would be worth approximately $53,500,000 - but with that same 50 million put into options, it could be worth up to $136,000,000! However, I think it is important to remember that this doesn't necessarily mean that this trade may be bullish. Depending on whether it was a closing or opening trade, it could mean a whole different view of the investor. With options, it is extremely hard to work backwards and use order flow to know what is going on. For example, this could have been a sell order and the investor is bearish/neutral on the stock market and just wants to collect some premium. It could have been a massive short fund just looking for some cheap protection. It could have been a big investor that just had a hunch and was ok with throwing 50 million away for the chance of making a quick buck. The bottom line is that we can speculate all we want, but there is no real way to know what is going on in their head when they press the execute trade button.

Does this really mean anything and will this continue?

While we may not know the true intentions of this trader, it is clear that options are gaining popularity in a wider market. Institutions have been using options for a very long time, but we haven't seen retail traders use options to this extent ever. Nevertheless, this may just be a short lived fad. While retail traders get back to work and their jobs, there has been a large decline in option volume and the amount of option contracts traded daily.

Conclusions

Whether this huge increase in popularity of options in the retail trading community is a short lived event, it is clear the options are going to be in the spotlight. Institutions have been using them more too, not all of the added volume is from retail traders, but it is clear that as people go back to work, there has been a lower level of option activity. Whether this means anything at a higher level - we won't know until the future. My guess is that this was just a one time thing, options poultry will continue to rise slowly, but it may be a while until we get back to pandemic levels. I don't believe that you extrapolate this into a higher level, where you start talking about online gmabling and the fact that people may be willing to take higher risks now. I think the bottom line is that there were a lot of people off of work that had time, but also had the excess liquidity to trade, and the market was good. Usually, these three don't happen in tandem. If people are off from work then the market must not be good because we are in a recession. If the market is good, that probably means that we don't have time because everyone is working. If there is high liquidity in the economy, that probably means the market is good, but people are busy working to achieve that liquidity. You can probably start to picture how this really was a perfect storm of events and I didn't even mention Gamestop! I think options are an incredibly powerful tool and I think that as more people become educated and aware of it, hopefully they will see an increase in popularity.

Works Cited:

Barrons and https://markets.businessinsider.com/news/stocks/investor-bets-50-million-on-sp-500-bull-run-options-2021-9