Part 2: The Top 5 Mistakes Options Traders Make

Two former traders share what they'd tell their younger self about options trading

Managing Editor
Aug 13, 2021 at 11:35 AM
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Earlier in the summer, on Schaeffer's Market Mashup, we profiled the most common mistakes options traders make. The roundtable featured Cboe Global Markets' Henry Schwartz, Senior Director, Head of Product Intelligence, and Robert Hocking, Senior Vice President, Head of Multi-Asset Solutions and Derivatives Strategy.

Part one discussed the lessons they'd give to their past self, each traders' top five mistakes they see options traders make. Now, in part two, they discuss the broader surge in market participation from retail traders, and how to further educate yourself. 

What trends have you seen in terms of these new retail traders that are flooding the market in their participation in the markets in the last year?

Henry: It's been an amazing year in terms of overall volume. The very first thing that jumps out at anybody that looks at this market is holy cow, we're looking at 35 to 40 million contracts a day in volume, which is basically double what we were looking at a couple of years ago. A lot of this is in the form of these tiny trades coming from the retail segment.

I've tried to look at the data a whole bunch of different ways. The simplest to me is just look at the smallest possible trades, the single contract trades. And there's been a big, big concentration of this growth in single stocks, even more than exchange traded funds (ETFs) and indexes, which are both up as well, but the retail segment that's seeing these incredible growth from this combination of the work-from-home period, which lasted a pretty long time and this emergence of the zero cost brokerage platforms. That combination has created an enormous amount of volume.

We see about three or 4 million contracts a day, and again, single contract trades, that just weren't there two years ago; they are brand new. Now, some of this is probably coming from institutional or professional traders and hedge funds. But small trades and a wider dispersion of symbols that they're active in, we have about 4500 underlying's with options today. And currently, about 40% of those have average daily volume below 200 contracts. So, those are the very liquid names. It sounds like a lot, but two years ago, it was about 60% of the listings had had average daily volume below 200. Another example in just the amount of the market, the options market, is that S&P 500 ETF Trust activity is about 10% in the last quarter, on a daily basis, and two years ago was about 17%. So, this retail base has really embraced options. And it's a really interesting shift, it's probably the biggest paradigm shift in terms of the way the options markets work that I've seen in probably since we truly began to automate trading and around 2000. Rob, you got anything else to add?

Robert: Yeah, I would just say it's an extremely exciting time for an exchange and to be around product development with this new market segment. And as Henry pointed out, the numbers are off the charts. I think that begs the question, and we get the question all the time at the exchange, will it continue?

I think the answer is yes. And I think so thanks to the increased access points such as smartphones, tablets, online trading platforms, information and the ability to trade is pretty much at everyone's fingertips now. I think this new investor class is here to stay because of it and if anything will continue to grow. Having direct control over your own financial growth can be really empowering and because of that, I think it'll continue to drive adoption.

Starting out it can be daunting to try to parse out what's good information, what's not who to trust and who not to What are some resources that are deemed irreplaceable?

Robert: I think options education is an essential component and something Cboe is heavily invested in off the top of my head from a resource perspective. I think back to my early days in trading when I entered the business, what was considered kind of the options bible at the time was Sheldon Natenberg's book, Option Volatility and Pricing. And then the other one that was big at the time was Lawrence McMillan's book Options as a Strategic Investment. 

Now with that, I'll give the caveat that when I got into the business, the internet was not what it was today, and there were a lot fewer resources out there. But I found those books helpful and it's what a lot of the trading firms would issue to help people really get acclimated to the market. I'd be remiss if I didn't mention Cboe's Options Institute is an incredible resource and has a variety of offerings that can assist users, really at all levels of sophistication,  on their options education journey. We offer educational webinars that you can find and register for through our events calendar on the Siebel Education website. We have our custom options, trading tools, which include an options calculator.

We have previews Cboe's trade alert functionality to let traders know what's going on in the market.  You can subscribe for a free trial to Cboe's live vol, which is our premier trading analysis tool, or you can subscribe to a monthly inside volatility newsletter to catch up on recent trends. And then we also offer bespoke programming and private tutoring suited for small groups or companies. We've made it our mission, to educate our people with that knowledge needed to really create lifelong investors. It's incredibly important to us.

Henry: I've traded, I've built software. Now I'm a part of Cboe. And that's a lot of spheres of the business. Education has always been I think a weak spot for finance in general. The internet certainly opened a lot of things up; there's resources available for a retail trader than ever. The tools that are available now for free to a retail account are better than what we started with a decade or two ago in terms of visualizing volatility, seeing quotes change, etc.

If you look up some of the academics, there's a lot of free stuff out there. But, you do have to kind of make sure things pass the smell test. Don't fall for some of the get rich quick scams that are out there, because they are out there.

An option is a tool just like a chainsaw is a tool. If you know how to use it, it's great. It saves you a lot of time and is very powerful. If you don't know how to use it, you'll be in the hospital To wrap up, I would say that  starting with the best base that you can get in terms of creating an understanding what you're working with, and being careful about it not falling for some of the pitfalls that that are out there is the way to go.

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