So they went to the stock market, then realized that options have similar payoff structures to sports bets.
With sports gambling, I stand to make some percentage of the money. It's the same thing with stocks and options, but with stocks and options there is thousands of bets you can make every day, and when you are in an up market like we have been experiencing, you can come to believe that the odds really are in your people who went up on options.
Why that type of activity?
Buying options makes some sense for people who want to participate in those kinds of trades. They may want to be able to sleep at night.
- There are valid mathematical reasons for this.
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It may be the only strategy they know. Another major factor: the presence of educational materials that are teaching traders how to trade options.
Equity trading also way up The increase in options trading is happening in tandem with a similar increase in equity trading. They also added 29, new accounts. Robinson noted that he is not seeing the same dramatic increase in trading in futures contracts, which are used more by professionals as hedging vehicles, or in index options.
How long will this elevated trading continue? Amidst all this bullish call buying, what could go wrong?
Options are used for many purposes, including the purchase of put options to protect portfolios from market downturns. But much of the action this summer has involved investor purchases of call options to effectively get leveraged bets on leading stocks. A bull market in tech stocks, near-zero trading costs, seamless online technology, and perhaps boredom for millions of Americans stuck at home, have all added fuel to the options-trading fire.
Sosnick told me the biggest risk was simple mean reversion: "You can get into a losing streak. It doesn't take much if you are buying risky calls to lose money after a few days or weeks.
What Happens to Options at Expiration? - Comment Below
When the vaccine comes out, volatility will likely go down, that will make it more difficult to day trade. He noted that one of the reasons the CBOE Volatility Index VIX has been stuck at the elevated 21 level despite a big rally is that the huge amount of call buyers has inflated implied volatility.
How many will stick around for the next correction?
How to Use Options to Beat the Market
The ultimate test to see whether these new traders stick around will be the next correction, Sosnick told me. But the best education for traders is a full market cycle, and we haven't seen that yet.
Many of these traders only came in after March, so they haven't seen a full cycle. Related Tags.
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