Empowering Retail Investors Creates Powerful Impact
You can’t talk about the great “Rise in Retail” without acknowledging the growth in options trading. Across the board, since 2020, total options average daily volume has grown from 29.04 million contracts in 2020 to 47.6 million as of August 2024.
As the pioneer of listed options, Cboe® has been at the forefront of innovation and accessibility since 1973. In other words, we’ve seen it and heard it all before. In 50 years, options have evolved from a small asset class, only available on a trading floor in Chicago, to a major piece of the trading ecosystem and used by people all over the world.
In my view, one of the greatest parts of this evolution is the growth of the retail segment trading options. Today’s retail traders have mastered equities trading and are ready for the next layer of building their portfolios, incorporating options to protect the investments they have and potentially grow their wealth. When more retail traders began participating in the equities market, they were embraced and encouraged and so they thrived. With this in mind, the capital markets industry should welcome the growth of retail traders in the options market with open arms. In my view, the influx of investors who are interested in participating in our markets benefits everyone. So, how do we roll out the welcome mat for retail?
The Myths
Contrary to the notion that retail traders are not sophisticated enough to trade options, my experience tells a different story. Before I was the CEO of Cboe, I spent a decade on the retail side with TD Ameritrade, leading the company as CEO from 2008 to 2016. At TD Ameritrade, our overarching purpose was to bring Wall Street to Main Street investors. We knew retail investors wanted to protect their investments, generate income and speculate on market events — just like any other investor — so we set out to provide education about all kinds of investment products, including options. We focused on leveling the playing field between Wall Street and Main Street. Having witnessed the sophistication of retail traders firsthand at TD Ameritrade, I can confidently say that most retail traders aim to invest their money wisely to grow and protect their wealth.
No one is born ready to trade options. Foundational knowledge about the basics of investing needs to be established first, and that takes time and experience. This is why retail brokers have tiers in place, allowing investors to move up the chain as they are ready. However, as an industry, we can help more people move up that chain, instead of arbitrarily keeping those who are ready to progress from accessing useful tools.
Options trading can be a powerful tool for helping everyday people plan for the future and pursue their financial goals. It is completely understandable to have that aim, and investors need education and resources to get there. Online forums, resources and mentorship programs can sometimes provide retail investors with the basics, but they need deeper instruction to succeed. Recent commentary assumes that because retail investors do not have all the knowledge institutional investors do, they are not fit for options trading. The data shows that more people are participating in the markets, so why don’t we embrace that and help them do so successfully?
JP Morgan Chase recently published a study that found the number of people younger than 40 years old transferring money to investments more than tripled over the past decade. And research from Charles Schwab asserts that “(Millennials) continue to be more heavily invested in ETFs, with 37% of their portfolios in ETFs.” This data shows us that more young people are investing in the capital markets than ever before. These investors understand the value of market participation and want to harness its potential to build generational wealth. While options can seem complex, and certain strategies high-risk, options are far from incomprehensible and dangerous. As these investors become more well-versed in investing, and their portfolios grow, my hope is that they are empowered with the right education to take the next step in managing their wealth. Options are essential tools for enhancing, protecting and diversifying investment portfolios, suitable for any investor — not just Wall Street.
Main Street investors are essential to our global economy, and they need to be empowered to spend and invest their money. As stewards of the global markets, financial institutions should be focused on creating more access to investment products, tools and education, which in turn will benefit everyone.
The Facts
Options come with numerous benefits, and retail traders deserve access to those benefits as much as any institution, professional or wealthy investor. The facts are clear: options enable people to capture stock performance with less capital, protect their assets, express a market view and generate income. And yes, options involve risk.
All investing involves risk, whether it is in the equities market or options market, a business or real estate. While options trading may involve risk, they are also a time-tested tool for hedging risk. I believe retail traders should continue to have easy access to trading equities, but they should then have access to protect those investments with options. Some believe restricting access to options trading is intended to protect retail investors, but enabling people to easily buy stocks, then restricting access to hedge that investment in the same way Wall Street investors do is just plain wrong.
Related to risk, options are not a “set it and forget it” investing product. It is important to
recognize the involvement required in options trading and ensure that is understood before people begin trading options. This is foundational to options trading and part of what keeps the ecosystem running. The options trading ecosystem is supported by a diverse range of participants who each play an important role in the market's functionality and stability. Institutions and banks leverage options for sophisticated strategies and hedging large portfolios, adding depth and stability to the market. Market makers and liquidity providers ensure smoother transactions for all participants, preventing significant price swings and enhancing overall market efficiency. Moreover, options are traded on-exchange in a transparent, highly-regulated market. This helps the entire trading ecosystem by aiding price discovery and further building trust among participants.
The availability of educational resources and increased access to simple and straightforward trading platforms has fueled the rise in retail investor participation. These investors, armed with knowledge and tools, are now more empowered than ever to use options trading to achieve their financial goals – whatever they might be.
Of course, hedging is not the only utility of options. Speculation and income generation are popular reasons to trade options. In reality, this is the goal of any investment asset class. An investor buys a stock believing it will increase in value and they will sell it for a profit. There is nothing wrong or overly risky about applying the same principle to options. In fact, when it comes to options trading, investors don’t have to be right directionally to make money, as there are other factors in their control. They can choose the risk of the trade, the probability of making money on the trade, their maximum loss, potential gain and how long they want to hold the contract. This customization is another great feature of options that is often overlooked.
Likewise, short-dated options, or 0DTE, trading is a very efficient way to protect an investment around an event that has raised some uncertainty while other investors might want to speculate on upcoming events—think Federal Reserve decisions or CPI prints. Today’s investors watch the events and either express their view of them or protect their other investments in preparation. These events do impact our global markets and 0DTE options is an efficient product to actively participate in the market around market moving events.
Speculative trading focuses on short-term gains with higher risks, often employed by traders looking to capitalize on market volatility. This aspect of options trading is often highlighted in media, contributing to its perception as a high-risk endeavor. However, long-term options strategies, employed by both retail and institutional investors, can be used for risk management, income generation and portfolio diversification.
The point is, one of the biggest values of options is that they can be used for all types of trading and investment objectives. The options trading ecosystem involves a wide range of participants who employ a wide variety of trading strategies. This complexity and versatility make options trading a valuable component of modern financial markets. Why should retail investors be precluded from utilizing investing and trading vehicles regularly used by Wall Street?
The Solution
As members of the financial services industry, it is our job — first and foremost — to provide trusted systems that enable people to confidently participate in the markets and economy. With that foundation set, our responsibility is to empower and educate people to participate in those systems to the best of their ability. The attempt to restrict options trading to a certain group is not aligned with that job description. Institutions do not need to be paternalistic, “protecting” retail investors from products and tools that we only deem suitable for people with enough money to invest on Wall Street. Instead, we need to trust that investors can make the right decisions to meet their own goals. Rather than acting as the gatekeepers of options trading, with arbitrary rules for who’s smart enough to join the club, let’s work together to make options trading understandable and a useful tool in more investors’ toolkits.
Comprehensive markets education will help level the playing field and give retail investors the skills to compete. Education is paramount to trading options, but that is true of almost everything, including trading other asset classes. As an industry, we need to continue offering robust markets education in every asset class, for all types of investors, including retail investors. We need to demystify the markets and help people see how they can trade and invest safely and successfully. Again, no one can jump right into options trading. The educational journey needs to begin with the fundamentals. Start by learning about single stock investing, then portfolio diversification. Then build up to more complex strategies that leverage products like options when there is a solid understanding of how they fit into the bigger picture.
Markets education is available, but often only if you know where to look. At Cboe, like many of our industry peers, we are striving to make our educational resources more accessible — bringing The Options Institute to classrooms, offering free online courses and engaging directly with retail investors. We are expanding our topics and creating content in multiple languages. I believe we are moving in the right direction, but we need to keep going.
As we build momentum in the educational space, we also need to reshape the narrative around investing. As I have said throughout this piece, investing of any kind should not be exclusive to Wall Street. While options trading tends to be the focus of investing myths, stock market participation as a whole is still thought of as risky, only for professionals or, worse, only for wealthy people.
We have come a long way toward making markets more accessible. Online platforms, self-directed accounts and zero-commission trading make it possible for nearly anyone to enter the markets, and with the right information, they can do so to their benefit. However, if we do not continue to enhance markets education and make it clear that anyone can be a market participant, Main Street investors will miss opportunities to grow and protect their wealth, leaving their piece of the pie to be enjoyed by people with enough money to invest on Wall Street.
There are important risks associated with transacting in any of the Cboe Company products discussed here. Before engaging in any transactions in those products, it is important for market participants to carefully review the disclosures and disclaimers contained at: https://www.cboe.com/us_disclaimers/. These products are complex and are suitable only for sophisticated market participants. These products involve the risk of loss, which can be substantial and, depending on the type of product, can exceed the amount of money deposited in establishing the position. Market participants should put at risk only funds that they can afford to lose without affecting their lifestyle.
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