That Free Options Trade Comes With Hidden Costs
Bob Henderson - WSJ
A reminder to traders piling into bullish options that the stock rally will continue: the bets can come with hidden costs.
A study by researchers at the London Business School found individuals paid $6.5 billion in hidden costs for trading options on platforms such as Robinhood during the pandemic.
/jlne.ws/3XC6Z4D
12 hours ago
That Free Options Trade Comes With Hidden Costs
By
Bob Henderson
, Reporter
A reminder to traders piling into bullish options that the stock rally will continue: the bets can come with hidden costs.
A study by researchers at the London Business School found individuals paid $6.5 billion in hidden costs for trading options on platforms such as Robinhood during the pandemic.
The reason comes down to the difference between how much a trader buys or sells an option for and how much it's worth, resulting in so-called indirect transaction costs that far exceeded commissions. The researchers studied the period between November 2019 and June 2021—when retail investors sharply increased their options trading.
The researchers also found:
Indirect costs averaged 6.3% of option value.
Traders paid about $950 million in commissions in addition to their indirect costs.
Retail option traders tend to focus on cheaper, shorter-term contracts that tend to have higher indirect costs than more expensive, longer-dated options.
Individuals lost at least $2 billion trading options during the period.
The researchers pointed out that the rise in retail options trading mirrored the growth in so-called "pay for order flow," a practice in which wholesale trading shops such as Citadel, Susquehanna and Wolverine pay brokers such as Robinhood to have trades routed to them.
Bob Henderson - WSJ
A reminder to traders piling into bullish options that the stock rally will continue: the bets can come with hidden costs.
A study by researchers at the London Business School found individuals paid $6.5 billion in hidden costs for trading options on platforms such as Robinhood during the pandemic.
/jlne.ws/3XC6Z4D
12 hours ago
That Free Options Trade Comes With Hidden Costs
By
Bob Henderson
, Reporter
A reminder to traders piling into bullish options that the stock rally will continue: the bets can come with hidden costs.
A study by researchers at the London Business School found individuals paid $6.5 billion in hidden costs for trading options on platforms such as Robinhood during the pandemic.
The reason comes down to the difference between how much a trader buys or sells an option for and how much it's worth, resulting in so-called indirect transaction costs that far exceeded commissions. The researchers studied the period between November 2019 and June 2021—when retail investors sharply increased their options trading.
The researchers also found:
Indirect costs averaged 6.3% of option value.
Traders paid about $950 million in commissions in addition to their indirect costs.
Retail option traders tend to focus on cheaper, shorter-term contracts that tend to have higher indirect costs than more expensive, longer-dated options.
Individuals lost at least $2 billion trading options during the period.
The researchers pointed out that the rise in retail options trading mirrored the growth in so-called "pay for order flow," a practice in which wholesale trading shops such as Citadel, Susquehanna and Wolverine pay brokers such as Robinhood to have trades routed to them.