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.

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.

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.

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).

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).

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.

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.

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.