Stock market volatility is up, and day traders are rushing into options, lured by the prospect of high profits, while ignoring the risks. Online brokerage firms Charles Schwab, E*TRADE, and Fidelity are seeing surging options trading, while TD Ameritrade indicates that increasing its options volume is a top priority, The Wall Street Journal reports.

“I could invest $100 and get 100% return on it. Just looking at how powerful it was to make money … it was hard for me to sleep for a couple of days,” day trader Martin Rogers told the Journal. He has traded options via his mobile phone since the summer of 2018. “If you can figure out how to tackle your kid’s dorm room furniture, you can easily tackle options trading with E*TRADE,” claims a recent tweet from the trading platform.

“It’s sort of like, you come to Vegas and no one is recommending you drink and gamble, but it’s available,” worries Benjamin Edwards, a law professor at the University of Nevada, Las Vegas who also runs a free investor clinic, in remarks to the Journal. He sees a growing number of small investors losing large sums on gambling with options. The table below summarizes the recent action at leading online brokers.

Options Trading Surge at Online Brokers

  • Schwab: options trades up by 36% in 2018 vs. 2017
  • Schwab: households trading options up by 17% in 2018
  • E*TRADE: today 25% of accounts approved for options trading
  • E*TRADE: in 2016, only 15% of accounts were approved
  • Fidelity: households trading options up by 11% in 2018

Source: The Wall Street Journal

Significance for Investors

Speculators who buy options run the risk of losing their entire purchase price, which includes option premium plus commissions. Those who write, i.e., sell, options run potentially much greater additional risk.

Writing a naked call option on a stock runs a risk similar to that involved in a short sale. If the underlying stock appreciates in value, and the option is exercised, the writer will have to obtain that stock for delivery, at whatever the cost.

The writer of a naked put option may be forced to purchase a stock at a price above its current market value, should the option be exercised. The buyer of that put option, who is on the other side of the transaction, will exercise it if the market price of the underlying stock falls below the put option's strike price, or exercise price.

“Options are more profitable” than equity or ETF trades for brokerage firms, as Steven Chubak, director of equity research at Wolfe Research, told the Journal. For example, buying 100 shares of Apple Inc. (AAPL) at E*TRADE costs $6.95, while the charge is $7.70 for a single options contract, per the same story.

Better yet for the brokerage firms, options contracts expire weekly or monthly, forcing even more active trading than with stocks, Chubak adds. He notes that E*TRADE now derives about one-third of its trading volume from options and other derivatives.

Looking Ahead

"This feels familiar,” law professor Benjamin Edwards said. He sees similarities with the Dotcom Bubble of the late 1990s when scores of first-time investors opened online brokerage accounts, bidding up the prices of internet and biotech stocks that eventually crashed.