Amateurs Pile Into 24-Hour Options: ‘It’s Just Gambling’ Rookie speculators try to strike it big on short-term investments that often act like lottery tickets By Gunjan Banerji Sept. 12, 2023 12:01 am ET 158 RESPONSES Explore Audio Center Lucas Sommer woke up around the time the stock market opened and, still bleary-eyed, opened his Robinhood app. He had a hunch it would be a good day for stocks, so he scooped up some options contracts that would profit if the tech-heavy Nasdaq Composite Index rose that day. By the time he was toweling off from a shower, though, the market had ticked down and his options had taken a big hit. “That’s a $1,000 shower,” he recalled thinking. Soon after, the options he bought for $3,000 were worth $80. Sommer, a 38-year-old digital-advertising entrepreneur in Portland, Ore., is one of the many amateur investors who have moved beyond the meme stocks that turbocharged markets in recent years to even riskier financial instruments that often act more like scratch-off lottery tickets. Trading is booming in options that expire in as little as a day, or sometimes just hours. For a small upfront fee, investors get the chance for a big payout almost immediately. The downside, as with the lottery, is getting back zero. Options enable traders to leverage their bets on individual stocks. They get the right, though not the obligation, to buy or sell shares at a set price by a stated date. Average daily options volumeSource: Options Clearing Corp. '10'2019902000010203040million contracts Not long ago, options trading was seen as best left to professionals with access to sophisticated trading tools and data. Now, a new generation of rookie speculators have been trying to strike it big betting on short-term options. Shorter-dated options, expiring in five or fewer days, accounted for about half of all options-market activity as of August, according data provider SpotGamma, up from around one-third three years ago. Individual investors made up 27% of all activity in options as of June, up from 23% at the start of 2020, according to Bloomberg Intelligence. For popular one-day options tied to the broad S&P 500 index, individual investors made up around one-third of all trades, according to exchange-operator Cboe Global Markets . Share of all options volume that expires in five or fewer daysSource: SpotGamma 2019'20'21'22'2301020304050% A study by finance experts at the London Business School estimated that most individual options traders lose money. Between November 2019 and June 2021, such investors notched losses of some $2.1 billion, with the hits concentrated in shorter-dated trades, the study concluded. “We should stop pretending that’s what’s going on is investing,” said Benjamin Edwards, a professor at the University of Nevada in Las Vegas who has studied securities law. “It’s just gambling.” Investment professionals have been closely tracking the activity of the rookie traders. Some pros say that wild options activity at the start of the pandemic contributed to mammoth one-day stock moves. Many also pointed to soaring options activity as a driver of the sharp swings in recent years in the shares of carmaker Tesla and meme stocks such as GameStop and AMC Entertainment . “It’s a really big revolution for the market in the U.S.,” said Julien Stouff, founder of Geneva-based investment firm Stouff Capital, who regularly trades the options. “At one point, it will be dangerous.” The boom in trading, he said, has helped suppress stock-market volatility at times this year, but also could make any turbulence worse, leading to a deeper market swoon. Chicago-based Cboe, the largest options exchange, has said such concerns are overblown, and that trading activity in S&P 500 options isn’t affecting the broader markets. Gains in the stock market this year have fueled interest among individual investors in options, which can enable them to make short-term, high-return bets on stocks continuing to climb. Stock-price movements can cause options values to rise or fall much faster than the values of the stocks themselves. Trades that expire the same day can offer the fattest rewards—and carry the biggest risks. Shorter-dated options bets have become so popular they have their own nickname, 0DTE, shorthand for zero days to expiration. Already this year, there have been tens of thousands of mentions of the hashtag #0DTE across Twitter, YouTube and Instagram, and a litany of online communities on Reddit, according to analytics company Hootsuite. A few years ago, there were hardly any such mentions. Mentions of one-day options, called '0DTE,' on social mediaSource: HootSuiteNote: Based on data from Twitter, YouTube, Instagram and Reddit. 2020'21'22'2305,00010,00015,00020,00025,000 Overall options activity has smashed records in each of the past three years. About 44 million options contracts have changed hands each day so far this year, on average, an 8% bump from last year and more than double the figure in 2018, according to figures from Options Clearing Corp. The activity got especially heated in 2022, when one-day contracts tied to the S&P 500 and Nasdaq-100 indexes took off. Traders have spent more than $1 trillion on options bets tied to the S&P 500 this year, according to Cboe. This year, around 40% of all activity expired the same day. Kyle Klett, 31, said he has made some painful trades over the past two years, including a string of mistimed one-day options that cost him tens of thousands of dollars. Still, he said, the big wins have enticed him to keep trading. In late June, during a stint in Las Vegas playing in the World Series of Poker, Klett said, he scooped up more than 300 contracts that would pay off if the S&P 500 index rallied by the next day. After he spent a sleepless night checking the futures market for clues on what would happen in the morning, he said, the S&P 500 rose 1.2% and he made $71,000. He celebrated the big win—and his birthday—by playing roulette and slot machines while hopping from casino to casino on the Las Vegas Strip. “I lost $25,000 in poker but smoked the market,” he said. Klett said he places around eight options trades a day, and typically doesn’t hold them for more than seconds or minutes. He has ramped up his activity since losing his job earlier this year, he said, and hopes to make enough trading to buy a million-dollar home. Kyle Klett, an avid options trader, playing poker. PHOTO: BRANDAN BRUGGER Lucas Sommer trades options in what he considers his ‘gambling account.’ PHOTO: LUCAS SOMMER He said he has clawed back his prior losses and has made more than $100,000 on his one-day options trading. “I’m just exceptionally great at it,” he said. Wall Street firms profit on such trading. So-called bid-ask spreads—the difference between buy and sell prices in the open market—are much wider for options than for stocks. Professional trading firms such as Citadel Securities and Susquehanna International Group that buy and sell such options to investors pocket some of that difference. At times, options volumes surpass activity in the stocks themselves. Brokerages made more than $2 billion from selling options orders last year, more than double what they made from stock orders, according to Bloomberg Intelligence data. Sommer, the Oregon entrepreneur, said he has been trading options regularly since 2018. He has experienced exhilarating highs and painful losses, he said, and has had more than one conversation with his wife about big money-losing trades. “I’ve been addicted to this options stuff for quite some time,” he said. “You get hooked.” He does most of his options trading on Robinhood, in what he considers his “gambling account,” he said. “You now have the power to gamble in your pocket,” he said, comparing the market to a casino. His long-term investments are with another brokerage. He estimated that he lost thousands in the Robinhood account in 2022 and is roughly even this year. In December, he said, the account dropped from about $8,000 to zero because of some ill-timed trades. He had bet that the stock market’s nascent rebound would falter, but stocks kept rising. Before that, he bet big on mortgage company Rocket, buying bullish call options tied to the stock day after day in an effort to turn thousands of dollars into a million. He made about $12,000, only to quickly lose most of it. He poured even more money into shorter-dated options tied to the Nasdaq in an effort to recoup the money. Instead, he lost it all. “You hit black, double down, black, double down, black, double down,” Sommer said. Then, “red, you’re at zero.” The losses pushed him to alter his strategy, taking a more calculated approach and often using options to protect his stock positions rather than to just roll the dice. Now, he regularly shares his lessons, wins and losses with a group of other investors on the gaming platform Discord. “If you get it right, the upside is unlimited,” he said.
Agreed. And nanny staters rush to rescue traders from themselves. Rather than restricting "gambling" (there are clear similarities to short term trading, let's not sweep that under the rug), they should target the legions of scammers in this industry, e.g. "trading system" vendors. It's fine to sell a "trading system" if you're truthful about that the reason you're selling it is it's likely shit and does nothing more than coin tossing, but no snakeoil salesman says that. Especially when you can cherrypick a backtest as "proof".
"Gambling" is where the odds are <50-50 for you, yet you try to prevail in spite. 0Dte options may be 50-50 in probability, but can be 3:1, or 5:1 risk/reward for those who know Price TA. KISS, Baby!
At his young age, he should be looking at long-term investing, not getting rich "quickly". Why does everyone want everything RIGHT NOW? He has well over 20 years before retirement. Plenty of time to build up a really good retirement account. But losing like this all the time, unless he does get really lucky and hit the "lottery" on one of these gambles... he's going to be stuck with whatever pension he gets from his company(if any at all) and Social Security(if it still exists in 20 years).
You are also assuming that long term investing will somehow pay off. Work pensions are generally invested in the markets anyway. So if you don't think his company pension will survive, then his investments will also likely not work out. I just have this feeling that even the general idea of long term investments in an index fund will one day prove to not be the sure thing. Since 2008, its only been money printing and low interest rates that have kept the market alive. The next 15 years might prove to be totally different than the last 15.
%% Could be ; but much more likely to pay off that his like a lotto trades. Lotto = a stupid tax on people that cant do math. By the way US markets went up 100 years before Fed reserve; of course you had panic of 1907.......[bad banking\world wide],
I heard an opinion from someone that if people start early with crypto they're in better position to get their accounts wiped compared to someone who risks a life-long saving. I'm not sure I agree to this, but applies here as well