An Anatomy of Retail Option Trading

The recent surge in retail option trading has sparked concerns about gambling and significant losses. We show that these concerns may be exaggerated using a novel trader-level dataset of about $20 billion in retail stock and option trades between 2020 and 2022. Option trades account for nearly half of all trades in 2022, making them a vital part of retail trading. Moreover, many investors trade only options. Despite wide bid-ask spreads, retail option trades incur relatively small losses. Although options theoretically resemble lottery tickets, we find little evidence of positive skewness in realized dollar profits, contradicting gambling-driven trading. A typical retail trade is the purchase of a one-day S&P 500 index call held for an hour. Retail investors tend to trade options to affordably participate in high-priced underlyings and to obtain leverage. Overall, we offer the first thorough trader-level analysis of current retail option trading.