Here is an interesting article ... Although I think the author missed the boat on the cause in my opinion. The increase in options is most like the result of the PDT rule. It's what I would do if I didn't have an extra $25k laying around http://www.usatoday.com/life/cyber/invest/2002/03/18/net-options.htm M
I believe better fills and tighter markets are the cause. For years the public has been getting the shaft when it came to options. In addition, direct access has increased the learning curve and knowledge of potential traders. One note on the article: Tom Ascher who was EVP at IB has resigned to become the new CEO of NQLX - the JV of nasdaq and liffe which will trade stock futures. Sounds like an offer he couldn't refuse. (he's a good guy and i hope he does well).
"I noticed that options had a tendency of sucking in very intelligent people and blowing them up. The smarter the person, the more spectacular the blowup. Situations resemble each other; people who had been successful in the past and thought they had it all down pat were carried out feet first." - Nassim N. Taleb
I'm a bit surprised by the sudden rise. I have been heavily into options for almost 10 years and I too have seen many people blow up. Most don't use the contracts properly and succumb to fear and greed without properly assessing the risk/reward in my opinion. Many also seem to fail to realize the more inherent effects of IV, HV and other factors on pricing and their ties to the underlying. A motor vehicle, in the hands of an untrained person, is a very dangerous object that can take your life and the life of others. I think more folks need to apply that analogy to options trading. My first thought when I read this article on the sharp increase was that many more traders would lose more money much faster than before by using options. I guess I need to make sure I am on the other side of some of those trades.
The new PDT rule certainly got me more interested in options. I decided to try to trade them instead of swing trading stocks... I lost a good amount of money. This was due to my lack of knowledge, preperation, and failure to heed my own good money management rules.... I took a little time off, but now I'm back in the game with a different perspective... I think that options may continue to increase in popularity. They are becoming more well known for their hedging abilities...and then there is always the novice traders who want to try to make a lot of money with little knowledge. My biggest mistake was trying to time the options market. I've learned that patience is much more important than I thought it was. The reason that options have a tendancy to KILL experienced stock traders is because they have completely different characteristics than stocks. They behave tremendously different; this behavior is often not seen until too late....
Nothing beats options...nothing...of course, they can beat you, too. Martin Mayer said it best - "derivatives are about shifting risk to the dumbest guy in the room. " I thank sweet baby Jesus every day that there is always a dumb guy in the room.
While it's doubtless that the electronic marketplace has made options more palatable to the public, I'm not impressed by the jump in volume. QQQ is the biggest reason that options volume has mushroomed and it's underlying has gone from zero (didn't even exist) to the heaviest traded stock in the U.S. in four years. Index products are always the best bet for volume (remember when the OEX was trading 300k a day) because of the LACK of volatility. There's no need to worry about the Q's gapping up or down 50% on news. Options on individual equities still suffer from spotty volume with the exception of CSCO, INTC, MSFT, & IBM. IMO most undercapped PDT's gravitated to futures.
trying not to be the dumbest guy in the room... if somebody has mastered trading QQQ stocks, what are some of the high-level downfalls that could kill this person moving into index options?