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Day Traders are Back! Options Trading is Increasingly their Weapon of Choice

May 16, 2019

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions

As Retail Investors Flock to Options Trading, Trading Brokerages Smile Wide 

  • Retail investors that were infatuated with the prospects associated with day trading are being lured by brokerages to a type of trading with similar characteristics; options trading. According to a report by the Wall Street Journal, the prospect of winning big quickly that is associated with options trading attracts the same demographic of retail investors that have taken fancy to day trading. The problem? Both of these strategies can be extremely high-risk.  

 

  • Options contracts are types of financial derivatives contracts that give a holder the right, but not the obligation, to buy or sell a specific security at a specific price until a given point in time. Options contracts are often used by investors to protect downside risk or generated yield for a portfolio. However, options contracts can often be used for speculation, and because their change in value is a magnified from the underlying asset’s change in value, they can carry high risk/reward profiles. 

 

  • Trading brokerages are pushing their options trading products on clients regardless of their experience or investment knowledge. Brokerages like Charles Schwab and E*Trade Financial Corp. are beginning to rollout video tutorials and charting tools to help clients with options trading, however, it often simply creates a false sense of confidence.  

 

We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.
We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.

 

  • Still, trading brokerages are prioritizing the growth of options trading on their platforms for one simple reason; options trades are more profitable. As an example offered by the Wall Street Journal E*Trade would charge a $6.95 trading fee to buy 100 shares of Apple (AAPL) while a $7.70 fee would be applied to buy a single AAPL options contract.  

 

  • Charles Schwab, one of the world’s largest online brokers, reported 36% growth in the number of total options trades placed by clients in 2018 from the prior year. Charles Schwab also reported that the number of total households to place options trades in 2018 was up 17%. 
 
  • At E*Trade Financial Corp., the total amount of derivatives trades placed in the first quarter of 2019, most of which were options trades, were the third-highest quarterly total on record.
 
  • At Fidelity Investments, meanwhile, the number of total househoulds to place options trades jumped 11% in 2018 from the prior year. 
 
  • Trading brokerages have recognized the potential of growth in options trading for some time and have made moves to drive expansion. 
 
  • In 2009, TD Ameritrade Holdin Corp. Acquired thinkorswim and shortly after purchased Scottrade. 
 
  • In 2011, Charles Schwab acquired options trading platform optionsXpress.
 
  • Several years later, E*Trade purchased OptionsHouse 

 

 
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Global Top Stock IdeasTOP LONG & TOP SHORT STOCK IDEAS FOR GLOBAL MARKETSMONTHLY TOP IDEAS FROM OUR MULTI-FACTOR QUANTITATIVE MODELS