The Wealth-Destroying Behavior of Retail Option Trading

If your clients are seduced by television advertisements offering untold wealth accumulation through options trading, new research shows just how destructive that type of speculation has been.

The COVID pandemic coincided with a dramatic rise in retail investor participation in options markets. In 2020 alone, retail investors accounted for more than $250 billion of total single-name option volume. Is the attraction financially rewarding, or are option buyers, in effect, buying lottery tickets?

Tim de Silva, Kevin Smith and Eric So, authors of the December 2022 study, “Losing is Optional: Retail Option Trading and Earnings Announcement Volatility,” examined: the drivers of retail investor participation in options markets; how retail demand influenced the cross-section of option prices; and how their behavior differed across equity option markets. They used a dataset from the Nasdaq stock market that detailed buying and selling volumes at the contract-day level for options traded on Nasdaq and OMX PHLX exchanges. The data accounted for approximately 25% of market-wide option volume over their January 2010-February 2021 sample window. A key feature of the Nasdaq data is that it allowed them to observe whether a trade originated from retail, professional customers, market makers, firms or broker/dealers. Following is a summary of their key findings: