The Day Traders Are Back, Now Playing With Options

Discussion in 'Wall St. News' started by dealmaker, May 12, 2019.

  1. dealmaker


    The Day Traders Are Back, Now Playing With Options
    Compared With Buying Stocks, The Fees And Risk For Individual Investors Are Considerably Higher

    Individual Investors Can Trade Options On Their Mobile Phones By Using The Apps Of Brokerages Including E*Trade. PHOTO: ANDREW HARRER/BLOOMBERG NEWS
    Lisa Beilfuss And
    Gunjan Banerji
    Updated May 11, 2019 9:46 A.m. ET

    Martin Rogers Has Been Regularly Trading Options From His Mobile Phone Since Last Summer, After Dabbling In Stocks And Derivatives For Years. A Pharmaceutical Representative Based In Winter Garden, Fla., Mr. Rogers Is Often On The Road And Has Been Drawn To The Ease Of Trading Between Meetings And The Possibility Of High Returns.

    “I Could Invest $100 And Get 100% Return On It,” Mr. Rogers Said. When He First Started Trading Options, He Was Blown Away By The Results. “Just Looking At How Powerful It Was To Make Money … It Was Hard For Me To Sleep For A Couple Of Days.”

    Mr. Rogers Is Among The Ranks Of Individual Investors Looking To Magnify Bets On Stocks. U.S.-Listed Options Volumes Hit A Record Last Year As Market Volatility Roared Back, A Welcome Boost To An Industry That Dealt With Years Of Flatlining Participation.

    Brokerages, Which Typically Generate Higher Profits From Options Trades Than Stocks, Say Individual Activity Is Growing. The Number Of Options Trades At Charles Schwab Corp., One Of The Biggest Online Brokers, Climbed 36% In 2018 From The Prior Year, With The Number Of Households That Had Placed An Options Trades Up 17%. At E*Trade Financial Corp. ETFC -0.58% , Derivatives Trades, Most Of Which Are Options, Were In The First Quarter The Third Highest On Record. Since The Start Of 2016, The Share Of Accounts There That Are Approved To Trade Options Has Risen To About A Quarter From 15%. Fidelity Investments Says The Number Of Households Trading Options There Has Grown In Recent Years, Posting An 11% Increase In 2018 From The Prior Year.

    Options Are Contracts That Give The Right To Buy Or Sell Stock At A Specific Price Later In Time. Used By Hedge Funds And Pension Funds, They Can Be Used To Protect Portfolios, Generate Income Or Bet On Popular Companies That Have Grown Expensive In The Stock Market. But The Appeal For Some Everyday Investors Can Be The Prospect Of Winning Big Quickly. The Catch: The Prospect Of Great Returns Is Paired With High Risk. When Buying Call Or Put Options, Investors Risk Losing All Of The Options Premium Paid. Selling Options Can Also Be Treacherous If Done Improperly, Leaving Investors On The Hook To Buy Shares Of Companies At Unattractive Prices If The Contracts Are Exercised.

    Mr. Rogers Said That He Was On His Way To A Profitable Year Trading Options In 2018 Before Markets Tanked In December.

    Up, Up And AwayU.S. Listed Options Volumes Surged To A Recordlast Year And Have Stayed Elevated.
    .Million Contracts2000’05’10’150246810121416182022
    Nevertheless, Some New Investors Say They Feel Confident Wading Into Options Because Of Video Tutorials And Charting Tools Offered By Brokerages. Meanwhile, Social-Media Groups With Newbie Investors To Swap Stories With And Self-Described Experts Willing To Share Tips Are Easy To Find.

    Consumer Advocates Say Brokerage Clients Should Be Cautious When Getting In On Options, Especially As Firms Make It Easier To Do So. While Brokerages Can’t Recommend Certain Types Of Products For Self-Directed Clients, They Are Allowed To Make That Kind Of Investing Possible, Said Benjamin Edwards, A Law Professor At The University Of Nevada, Las Vegas, Who Runs A Free Investor Clinic.

    “It’s Sort Of Like, You Come To Vegas And No One Is Recommending You Drink And Gamble, But It’s Available,” Mr. Edwards Said. He Said He Has Seen More Cases Lately Of Investors Losing Considerable Sums On Options Bets.

    Are You Interested In Trading Options For Additional Income? Why Or Why Not? Join The Conversation Below.

    Analysts Say Options Trading Is More Lucrative For Brokerage Firms, Which Still Collect Relatively High Commissions Compared With Stocks And Exchange-Traded Funds. At E*Trade, Buying 100 Shares Of Apple Inc. Would Cost $6.95 In Trading Fees, While Buying A Single Options Contract Would Cost $7.70.

    “Options Are More Profitable” For The Brokerages, Said Steven Chubak, Director Of Equity Research At Wolfe Research. Commissions Per Trade Can Be Higher, And Because The Contracts Expire Often Weekly Or Monthly, People Have To Transact More Often, He Said.

    Recent Investments And Acquisitions Indicate That Firms Are Increasingly Interested In Getting More Customers To Trade Options. In 2011, Schwab Bought The Options Platform OptionsXpress, Several Years Before E*Trade Acquired OptionsHouse. TD Ameritrade HoldingCorp. AMTD -0.09% Purchased Thinkorswim In 2009 And Then Scottrade.

    “Longer Term, We Want More Futures And Options Trading,” TD Ameritrade Chief Executive Tim Hockey Said.

    Doubling Down On DerivativesDerivatives Trades, Much Of Which Are Options,Now Make Up About A Third Of Total Trades AtE*Trade
    TradesDerivative Trades2017’18’19050,000100,000150,000200,000250,000300,000350,000400,000450,000
    E*Trade Has Been Particularly Active In Boosting Options Trading, Mr. Chubak Said. The Firm Has Increased The Share Of Trading From Options And Other Derivatives To About A Third Of Overall Activity. Recently, It Made A Pitch To The Masses By Tweeting: “If You Can Figure Out How To Tackle Your Kid’s Dorm Room Furniture, You Can Easily Tackle Options Trading With E*TRADE.”

    David Moadel, Who Teaches Options Through YouTube Videos, Says He Encourages Slow And Steady Income Generation, Rather Than Long-Shot Wagers That Are Unlikely To Make A Profit. It Is Not Always Successful, Though. For Beginners, He Compares Options Trading To Another Kind Of Popular Bet.

    “What People Are Most Interested In Is The Lotto Ticket Plays,” Mr. Moadel Said. “You Might Make $1,000, But What’s The Probability?”

    Mr. Edwards, The Law Professor, Likens The Rising Participation In Options To The Run-Up To The Tech-Bubble Bust, When Online Trading Became Ubiquitous And Brought Wall Street To Main Street. Then, Many First-Time Investors Flocked To E*Trade And Other Electronic Brokers, Chasing Internet And Biotechnology Stocks Higher Until Those Companies Went Bust.

    “This Feels Familiar,” He Said.

    Write To Lisa Beilfuss At And Gunjan Banerji At
    TraDaToR and Jasondupont like this.
  2. gaussian


    I've noticed this in my small circle of friends. People in my group know me as a trader, in particular, an option trader. I started getting suspicious when the non-traders in my group were suddenly trading options. I asked how - and it was ETrade and Robinhood.

    When you sign up you're supposed to demonstrate some knowledge of managing leveraged assets as a way to protect you from yourself. The problem starts when you apply normal ignorant logic to the options market. People are horrible at estimating risk, and they really don't like to be losing money. Therefore they optimize for cheapest dollar to highest return - AKA the deep OTM weekly hail mary. If you hit, you make 300% returns. If you miss, you lose everything.

    Robinhood in particular is basically a casino. They make their money selling the dream of instant riches to suckers, taking their vig, and making a little extra selling all of their order flow to HFTs. It's the next generation of predatory scam. Their execution (from what I've heard) is bad enough I wonder if they are actually a bucket shop.

    TDA et al. want more futures and options traders because the chance of blowing out is exponentially higher. You're placing huge bets with huge leverage. I'm normally not against people handing me money (it's zero sum after all), but this is a borderline con. The SEC needs to come down on these companies hard for being so fast and loose with derivatives.
    Windlesham1 and helpme_please like this.
  3. S2007S


    There is a guy I know who trades options, they were doing extremely well, believe it was the first time they were trading options, took his account sky sky high highhhhh, but last I heard they weren't doing too well. I started trading options too, having the easy access on Robinhood and having the option for free had me pursuing a few trades, However my option trades have been nothing more than $100 at a time since I have never done that type of trade and because I'm just testing how they work. Some go all in and lose everything in a matter of weeks.
    I'm thinking most reasons why options have taken off is because of Robinhood. Having the ability to trade options for free is a big plus, plus it's easy to get access to options on Robinhood. Wonder if they will offer futures trading soon ....
    trader99 likes this.
  4. S2007S


    I'm on Robinhood, have no problems and yes I know all about order flow and how they make their money but I'm happy saving $3000+ a year on commissions!!!
    trader99 likes this.
  5. You must be poor at math. The TOTAL cost is what counts.
    sss12 likes this.
  6. gaussian


    Oh you sweet summer child.

    Options have been huge since the 80s and have been one of the most liquid markets to trade in since the mid 90s. Robinhood has just realized what Nadex did. There are a ton of suckers in the market that don't understand the instrument. This is nothing but an advantage play by the casinos. If I didn't have even the smallest shred of ethics I'd probably open up my own option shop and sell people lottery tickets too.

    That's shortsighted of you. Have you noticed the bid/ask on options you're trading? Perhaps Robinhood is building their commissions into the spread AND making money off your back from HFTs.

    Your round trip costs include more than commissions. This is a perfect example of why Robinhood is a casino. People who don't understand this probably should take a few classes on options pricing before diving in. The SEC should come down on these companies for not enforcing even the smallest iota of check on the level of experience people have.
    sss12, Clubber Lang and ironchef like this.
  7. S2007S


    I'm far from trading thousands of options and I do see how wide the bid and ask is but I only trade options where the spread is a penny or three wide. Not only that but I'm trading a contract or two not 5000 or 10000. So I could care less about a few extra pennies on the spread.

    And if this is such big news about how Robinhood makes their money why isn't the sec doing anything? If it's clear as day how they are selling their orders and profiting off option spreads why isn't anything being done to stop this mayhem.

    I have 4 trading accounts and out of all of them I use Robinhood for 98% of my trading. I put my limit orders of what I want to pay for a stock. Get my shares and move on. I don't complain how they sell my order to the other guy. Unless you are buying tens of thousands of shares and using market orders then maybe try etrade or Ameritrade. But if I'm placing a limit order to buy XYZ at 24.75 on Robin hood and get my shares for free than what's the difference of using Robin hood or Ameritrade for that same exact trade.
    Too many people up in arms about how Robinhood processes their trades. Who cares. Last year I saved over $2500 in commissions...I'm happy with that ...
  8. trader99


    I trade options through Robinhood as well. I have saved thousands on commissions. I have been screwed by wide bid-ask spread. So nowadays, I only play the more liquid names. If you manage your position size and keep to decent risk management, then it can be a great way to generate $$. When I was on my winning streak, I was making thousands per day.
  9. gaussian


    The Robinhood fanboyism is too much.

    There's a lot more to a platform than commissions. I am with IB, some of the lowest commissions in the country (I think their only competitor is lightspeed). I have yet to see Robinhood advertise on any major trading journal, magazine, etc. This tells me exactly who their clientele are. The financially illiterate looking for that one lottery ticket that will free them from the otherwise inescapable monotony of being below average. Their entire platform is a cobbled together mess, their execution is garbage, and their only selling point is cheap commissions. If that's what does it for you, great. They are not a good brokerage by even the smallest stretch of the imagination. At some point you have to ask yourself if the average investor on Robinhood is a representation of yourself - in all cases I'd say Robinhood "investors" are exactly the same kind of unsophisticated person that gives them the churn they need.

    It is a scam. I wouldn't be surprised if Robinhood went tits up in the next recession. I would LOVE to see them try to figure out how to collect on what amounts to billions in margin calls from people who can't even afford rent on a regular basis. It will be glorious.
  10. trader99


    Don't call me a fanboy! I've used IB for over a decade now and I love it. I use RH selectively for certain things, I'm not the typical profile of an RH investor/trader. I trade and know financial markets well. I used RH for certain very precise situation. Not for everything. :)
    #10     May 12, 2019