Trends in options trading
Steven W. Poser
Director of Research
Published
December 4, 2023
Retail participation in options market trading rose sharply during the pandemic, peaking at 48% in July 2022. While it has bounced around since then, it hit 45% in July 2023 (Chart 1). This data suggests that substantial retail options trading is here for the foreseeable future.
Estimating the amount of retail trading in options trading requires a different methodology than used to estimate retail equities trading. We recently authored two articles discussing retail trading activity on the U.S. equity market: one on low-priced stocks and the other on market breadth.
Unlike equities1, all options trading is executed on exchange and reported to the Options Price Reporting Authority (OPRA) - the options equivalent of the equity markets’ Security Information Processers (SIPs). However, there are several mechanisms that allow market makers to offer price improvement and/or receive allocations on orders that are sent to them. These features allow us to estimate retail traders’ share of the U.S. options market.
We use a modified version of the methodology presented in a recent London Business School research paper.2 We combine trading in price improvement auctions, such as NYSE American’s CUBE, along with small trades executed electronically.3
Trades that meet any of the following conditions are counted as retail: fully electronic trades up to 10 contracts4, all executions in non-ISO/AON/complex price improvement auctions (regardless of trade size) and electronic trades greater than 10 contracts, if the total notional size of the trade was not greater than $5,000. We use the 10-contract limit because multiple options exchanges offer the ability for market makers to interact with order flow they provide up to five contracts, which may encourage trades close to that size to be executed electronically.5 While this methodology is not perfect – we are basing the volume from trades reported to the OPRA SIP - which could be part of larger “parent” orders – without direct knowledge of what trades are truly from retail customers, this methodology should provide a reasonable estimate.6
As Chart 1 below shows, retail’s share of options market trading rose sharply during the pandemic. In late 2019, retail options volume ranged between 34% and 38% of total trading7, peaking near 48% in the second half of 2020. It recently slipped to near 38% in October 2022, but has risen again, reaching 45% in July. The chart separately shows how much of total volume is from price improving auctions. Price improvement auctions have remained steady near 15% of total volume, while electronic trades8 by retail accounts notched larger gains.
Chart 1: Retail Share of Options Trading
Short-dated Options trends
The launch of exchange-traded U.S. equity options in 1973 offered only quarterly expiration dates in March, June, September, and December. Later, longer-term options (LEAPS) and monthly expiration dates were introduced. In recent years, weekly options series, and now even daily options expiries9 in SPY and QQQ, have been added.
The shortest to expiry options have increased sharply as a share of the U.S. options market. In November 2019, options with zero or one day to expiration were just over 12% of volume. As of the end of September, these options volume reached nearly 31%, with 22% in short-dated options10. This is due to activity on the final day of options trading for weekly, monthly, and quarterly series. Chart 2 below shows this trend. Short-dated options share rose from 6.4% in November 2019 to 21.6% through September 2023.
Chart 2: Share of Options Volume Trading by Time to Expiration
The rise in retail trading happened at the same time as the rise in short-dated options. This trend is even more pronounced for trading we determine to be retail (Chart 3). Specifically, 56% of all retail options volume is now in options with five or fewer days to expiry, compared to about 35% in November 2019. Short-dated options share more than tripled to 26.3% from 7.8% over the same period.
Chart 3: Share of Retail Options Trading by Time to Expiration
It is also instructive to understand the retail share of options trading activity by days to expiry as shown in Chart 4. As we previously noted, currently, overall retail share of the options market is around 45%. However, retail is far more prevalent in shorter dated options than in options with greater time to expirations. For example, we estimate retail accounts for 34% of options trading of options with roughly 1-3 months to expiration, and about 31% for options with more than three months to expiration. Short-dated options are currently 51% retail. This number dipped to 41% at the onset of the heavy pandemic trading in March 2020, before trading approaching current levels from late 2020 until early 2022. It began to slip through 2022 before returning to pandemic-era levels, as options volume concentration has continued to rise in SPY and QQQ, which are heavily concentrated in short-dated options activity (see next sections).
Chart 4: Retail Share of Trading by Time to Expiration
Low-price Options Trends
One point that has often been mentioned is that retail traders are more likely to buy low priced options than institutions. We categorize low-priced options as any options contract traded at a price of $0.25 or less. While traders do not necessarily expect these options to ever finish in-the-money, their activity implies an expectation of a quick move in the direction of their trade, which can result in very large price changes. While the overall increase in short-dated options trading is likely to cause increased volume in low-priced options, we still find a substantial difference in the share of retail volume in such contracts, compared to non-retail volume. Recently, 28% of retail volume has been in low-priced options. This compares to 25% across all accounts (Chart 5).
Chart 5: Share of Volume in Low-price Options - Overall vs. Retail Accounts
Symbol Concentration
Much like notionally-weighted trading in the U.S. equity market, which has been dominated by passive trading via a few very large ETFs11 and a small group of mega-cap stocks, concentration in options trading volume has increased sharply in recent years. As Chart 7 below shows, more than half of all options contract volume is now in the ten largest symbols. Prior to the pandemic, retail trading was noticeably less heavily weighted to the top 10 securities, but over the last two years, the retail and overall trend have largely merged.
Top 10 non-ETP Symbols by Volume 2023:Q3
| Rank | Overall | Retail |
|---|---|---|
| 1 | TSLA | TSLA |
| 2 | NVDA | NVDA |
| 3 | AAPL | AAPL |
| 4 | AMZN | AMD |
| 5 | AMD | AMZN |
| 6 | AMC | META |
| 7 | META | MSFT |
| 8 | MSFT | PLTR |
| 9 | PLTR | AMC |
| 10 | BABA | NIO* |
Chart 6 below shows the increased concentration of single-name symbol volume. Concentration has grown steadily since 2019, with even greater concentration by retail accounts. More than 40% of single-name retail options volume is in the top 10 symbols compared 26% in November 2019. Overall growth is a bit less, rising to 37% from 23% during the same time.
Chart 6: Share of Volume in Low-price Options - Overall vs. Retail Accounts
Conclusion
Most estimates of retail trading in the U.S. stock market centers around 50% of total market volume. Using our estimate, retail share of U.S. equity markets options volume is slightly lower at 45%, although differing measurement techniques may account for the small disparity. The increase in retail options share was initially fueled by the pandemic in 2020 and has continued to grow as retail options traders have latched on to short-dated options to make bets on market direction. There has also been an increasing share of volume in low-priced options, further fueling overall options volumes, and especially retail trading. None of these trends appear to be in danger of reversing.
The continued increased concentration of trading in a few large ETFs has also reared its head in the options market. While we do not see this as a necessarily permanent shift, until investors broaden their focus to smaller cap issues, which have less coverage in the options market, this trend is not likely to reverse any time soon.
1 Most US equity retail activity is routed to “wholesale” market makers, executed off-exchange and reported to one of the FINRA Trade Reporting Facilities (TRFs).
2 Retail Trading in Options and the Rise of the Big Three Wholesalers, forthcoming Journal of Finance
3 We exclude complex multi-leg trades, trades executed on the various options trading floors, other auctions, and non-standard order types such as Intermarket Sweep Orders (ISOs), which retail accounts typically cannot access.
4 We make use of proprietary data to identify executions that are tagged as customer trades.
5 We look for trades that have a customer on one or both sides of the trade. We divide this measure by total options volume. This is like how retail activity is estimated in U.S. equities. However, in U.S. equities, retail orders rarely execute against other retail orders. There is greater opportunity for retail orders to trade with other retail orders in the options market because all orders execute on exchange. We can calculate a related retail value, which would measure all sides - buys and sells. This roughly halves the retail share we used for the article. We chose the single counted statistic because it is in more common usage.
6 The paper noted above (Retail Trading in Options and the Rise of the Big Three Wholesalers) attempts to eliminate the parent order issue by looking for trades executed on the same exchange at virtually the same moment to eliminate larger orders. While this may help, it may over filter, as there also may be many small trades broken up by algorithms that get captured in the five-contract limit. OPRA data does not indicate customer-type (Customer/Firm/Market Maker), which could help with this kind of filtering.
7 When we calculate share of volume, we consider both the buy and sell side (or equivalently, the liquidity providing and liquidity taking side). If reported volume is 100 contracts, then there were 200 contracts traded - 100 bought and 100 sold. Our estimates count one side of the simple price improvement auctions as retail and estimates both sides of OPRA auto trades.
8 Electronic trades are the difference between the total line (blue) and the price improvement auction line (black).
9 SPY and QQQ options series have expiries for each day of the week and are initially issued as options with two weeks to expiration. IWM has expiries on Monday, Wednesday and Friday, initially issued with a two-week life. USO, UNG, GLD, SLV and TLT have two-week options that expire on Wednesday and Friday.
10 Options expiring on the same day.
11 The top two options trading symbols are ETFs: SPY and QQQ. Their retail options volume was greater than the next nine options in September 2023, and the next 12 for all options trading.