Surge in options trading helps drive gains on Wall Street
Fed gives many investors confidence to double down on a rising market
LOS ANGELES, Sept 13, (AP): Stock options trading is up sharply this year, fueled by investor optimism for more gains on Wall Street.
Options are contracts that give investors the right, though not the obligation, to buy or sell a stock at a future date and at a set price. Often, though, investors look to make money trading the contracts, rather than by holding onto them.
Through the first eight months of this year, options trading volume is up nearly 46% from a year ago, according to data from Options Clearing Corp., which tracks options activity across 16 exchanges. Just last month, trades jumped 30.4% to around 611.8 million contracts. That made August the thirdhighest month on record in terms of options trading volume, OCC said.
Zero-commission trading platforms like Robinhood and E-Trade have helped make the options market more accessible to investors, even those with little or no experience. And increased market volatility, which favors shortterm investing, has made options trading potentially more lucrative.
Uncertainty over the economy’s recovery from the pandemic, when a proven vaccine for COVID-19 will be available and how the elections will turn out, could make for more volatility on Wall Street in the months ahead. At the same time, low interest rates and billions in bond-buying by the Federal Reserve have helped prop up the market through the pandemic, and the central bank has signaled it intends to continue doing so. That’s given many investors confidence to double down on a rising market.
“It actually makes sense to engage in that type of investing if you have high volatility,” said Pauline Bell, an analyst with CFRA Research. “That’s what we’ve seen throughout 2020. The strategy isn’t going anywhere any time soon.”
What makes options trading especially attractive is that the investor pays less money to buy an options contract – to essentially make their bet on whether a stock will go up or down – than they would buying shares in a company at full price.
In addition, if the market is moving in a direction that favors their bet, an investor can opt to sell their option contract and make money on that, rather than waiting to exercise it. Contracts establishing the right to buy a stock are known as “call” options, while those securing the right to sell it are known as “put” options.
“This is a way for them to play the
market on the cheap,” Bell said. “It’s a small entry price to basically gamble on the market.”
Where traders can get into trouble is if their bet goes the wrong way, especially if they borrowed money to purchase their option contracts.
Technology sector stocks have led the market higher this year on expectations they can continue to deliver strong profit growth, regardless of the economy, so it’s no surprise that they have been favorites among option traders. The volume of option contracts to buy or sell
Microsoft and Tesla shares are up more than twofold from a year ago, while Apple option contract volume is up more than 86%.
A recent flurry of activity in options contracts on big tech stocks may have fueled more gains for the sector.