Retail Options Traders’ Behaviour

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Retail investors are individual, non-professional investors who buy and sell securities, such as stocks, options, and mutual funds, for their personal accounts rather than for an organization or institution. Unlike institutional investors, who manage large sums of money on behalf of clients or large entities, retail investors typically trade in smaller quantities and often use online brokerage accounts to facilitate their transactions.

A considerable amount of research has been devoted to studying retail investors’ behaviour. A recent paper by the CBOE [1] utilizes the exchange’s own data and refutes some academic research findings. The author pointed out,

Utilizing Cboe data focused on orders initiated by retail platform customers and executed on Cboe Options Exchange (C1), we observe a noteworthy presence of retail investors in the options market. Their participation has grown substantially from 18% to 31% between the fourth quarter of 2019 and the fourth quarter of 2023, underscoring their evolving role.

In contrast to recent academic research on retail options trading, which frequently overlooks complex orders initiated by retail investors, our analysis of open positions in terms of notional value reveals that retail investors’ complex orders accounted for 58% to 76% of retail open positions during the same period.4 This challenges the prevailing assumption that retail investors exclusively maintain long positions. Our study unveils the versatility of retail investors’ trading strategies.

…our analysis of market maker order imbalance in SPX options over a longer historical window shows a significant reduction since mid-2020. The monthly market maker order imbalance has decreased from -14% in December 2016 to -12% in May 2023. This finding challenges the notion that the recent growth of 0DTE SPX options has increased market maker order imbalance.

In our robustness analysis, we exclude SPX options from the sample. This analysis reveals that retail trades represent 32% to 40% of the non-SPX options traded on C1 from the fourth quarter of 2019 to the fourth quarter of 2023 in terms of notional value.

This research by the CBOE, using more complete data, sheds light on the behaviour of retail options traders. It provides more insight into the changing dynamics of the options markets.

Let us know what you think in the comments below or in the discussion forum.

References

[1] Selina Han, Unveiling the Sophistication: Understanding Retail Investors’ Trading Behavior in the U.S. Options Market, May 2024, CBOE

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