How Options Trading Is Leading Market Action

How Options Trading Is Leading Market Action

Posted On August 11, 2021 3:16 pm

There’s been an abundance of macro news, including the flux of Covid, inflation debate, and the ever-present political (mis) alliances, creating an environment of thoughtful debate ;).  Bulls and bears have plenty of fodder to state their case. 

Claim your Options360 Concierge Trading Service trial subscription for the “insanely inexpensive” price of $9! 

One thing that hasn’t changed is the steady rise in options trading, with volume enjoying a 20% year-over-year increase in the past decade. The three main factors have been: Reduced commission fees (now nearly free) and dare I say, education, and most importantly, the introduction of weekly expirations. 

The popularity of options trading can be measured by a recent milestone where the number of options contracts on single stock listings surpassed the volume of shares traded on the underneath equity.  

single stock options trading volume

[Click Here] Test drive my Options360 Concierge Trading Service for just $9!

If you consider the notional value, options are now running at $320 billion per day, or some 25% above share transactions (Remember: Each option contract represents a right to 100 shares). And the focus continues to be in options expiring within two weeks. 

Call it the Robinhood (HOOD) effect, if you want.  However, institutional money is clearly involved, which has led to gamma squeezes.   HOOD reported blow-out earnings this morning with options trading surging by 170% — contributing over 50% to revenues.  

I’m on the fence on if the surge in short-term options trading is beneficial for the market’s overall health. 

On the plus side, I love the flexibility to actively manage positions, mainly through income collection via rolling diagonal spreads. However, I don’t like the fact that the creation of weekly expansion in strike prices has fractured liquidity. In other words, outside the top 50 names, bid/ask spreads have become obscenely wide — even in some well-traded names. The Options360 Concierge Trading Service deals with this by always using limit orders for Alerts.  If we don’t get a trade established at what I deem an attractive price, we take a pass. 

The other issue is whether we’re starting to get a “tail-wagging dog” effect. Again, this is related to gamma squeeze dynamics where the market-makers must continually hedge as prices move higher (or lower).  It, in turn, becomes a fragile situation.  Once a crack appears it can spread quickly as liquidity will evaporate. 

I remember my Chicago Options Exchange (CBOE) days when the 1989 mini-crash occurred (yes I got killed in UAL), and floor brokers were literally tearing up order tickets and walking out of the trading pits. The computers do the same when volatility increases; to an even higher degree. 

But, one must evolve and adapt. This means focusing on liquid names, right-sizing positions, and being ready to hit the eject button, as we did in TDOC yesterday, which is part of the disciplined process. 

This boils down to options activity becoming a major trading dynamic component. Thankfully, Options360 is on top of the situation. 

PS.  As I look to start packing for my move next week, I’m realizing the dearth of newspapers for wrapping plates and glasses. Oh well, I’ll adopt. Probably by buying some local papers, which I’ll never read, be quite a deal at $1.00.  However, don’t let my same-day five paper purchase suggest this represents a sustainable readership increase. 

[$9 MOVING SALE] Try out the trading concierge service that’s delivered its members 39% to 122% annual profits — Options360!

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.