Options Trading Floor

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Who uses Options? 

Before trading options, it's important to figure out who uses options. The easiest way to start is by dividing the industry between two sides, the Institutional Investor and the Retail Investor.

The Institutional Investor

This section highlights who uses options on the institutional side: 

  • Investment Banks 
  • Hedge Funds 
  • Mutual Funds 
  • Corporations 
  • Market Makers 

Investment Banks 

Investment Banks, which include include Goldman Sachs, Morgan Stanley, Bank of America, and JP Morgan play a significant role in the Options Industry. They commit their own capital and use experts to manage the risks. 

These Investment Banks create, package, and then distribute options products to their customers. The customers include insurance companies, investment funds, and retail investors. 

Investment Banks are also the largest providers of liquidity for exchange-traded options. 

Hedge Funds 

Hedge Funds are the most sophisticated investors in the world. They use investment products that range from stocks to bonds, currencies, swaps, convertible bonds, and options. 

Hedge Funds fall into three different Options categories: 

  1. Volatility Trading 
  2. Volatility as an Asset Class
  3. Directional Leverage 

1. Volatility Trading 

Volatility Trading involves buying and selling options based on mathematical calculations over a large amounts of trades. This type of trading requires intensive amounts of data, computing power, and expertise.

The Hedge Funds engaged in Volatility Trading include Citadel, DE Shaw, Two Sigma, and Jane Street. 

2. Volatility as an Asset

Over the last several years, Volatility has become a focus of institutional investors. These investors are looking for ways to use Volatility products to hedge their overall portfolio. 

This greater focus on Volatility has increased the popularity of products like the VIX and VXX. 

Hedge Funds and Retail investors also trade these products. In fact, Hedge Funds use these products in creative ways to hedge their portfolio. 

3. Directional Leverage

The majority of Hedge Funds use options for the leverage. Whether to protect a stock position, their portfolio, or to maximize potential gains, most Hedge Funds buy options and focus on the “direction” of the underlying asset (i.e. stock). 

Mutual Funds 

While Mutual Funds are known for holding a portfolio of stocks, a select few use options. Mutual Funds generally use two different strategies, selling options to generate income and buying options to protect their portfolios. 

Corporations 

Corporations use options to buy back company stock.

Years ago, Microsoft was one of the world's largest options users and sold options to a number of the Investment Banks as part of their Corporate buyback program.

In 2015, Home Depot announced an Accelerated Buyback Program with Barclays PLC Investment Bank. The bank structured a product where Home Depot would effectively buy their own stock back by selling options into the market.  

Market Makers 

Traditionally, Market Makers were humans trading on the exchange floors. However, computer trading has diminished their role over the last two decades. In fact, today, most market-making activity is done by computers.

The main function of a market maker is to provide liquidity to the options market. They are able to do this by trading options differently than today's average options investor.

Market Makers trade Volatility similar to the Hedge Fund Volatility Traders described above.

The Retail Investor

Now that you know who uses options on the institutional side, it's important to put into context the growing power of the retail side. In fact, options trading volume is now dominated by the average investor.

Breaking Records

While professional traders have enjoyed an advantage of speed and access over the retail trader, technology advancements has closed that gap. Today, millions of Americans use stock and options trading apps that provide similar tools used by the professionals at a fraction of the historical cost.

Not only is options trading more accessible to the average investor, the trading apps are easy to use. This has spawned a legion of options educators to pop up online willing to teach anyone that would listen.

This has led to record spikes in brokerage account openings during 2020, which ultimately led to surging options trading activity. To give some context, Options Volume records have been broken over the last 3 years.

Unfortunately, there's a serious problem looming.

At a Disadvantage

In the next few chapters, you'll learn why the available industrywide education is:

  • Confusing investors.  
  • Misdirected.
  • Incomplete.

I'll show you why it's the education that places the retail investor at a major disadvantage, which ultimately leads investors to significant losses over time. 

Sure, the retail investor understands how to press the buttons to make a trade. However, they fail to understand how to press the buttons in way that gives them a chance at long-term success.  

This lack of understanding is the driving force behind OptionsGeek’s groundbreaking education and a patented New Options Chain that helps investors finally shift the odds in their favor.

Options Trading Floor

<        MAIN MENU        >

Who uses Options? 

Before trading options, it's important to figure out who uses options. The easiest way to start is by dividing the industry between two sides, the Institutional Investor and the Retail Investor.

The Institutional Investor

This section highlights who uses options on the institutional side: 

  • Investment Banks 
  • Hedge Funds 
  • Mutual Funds 
  • Corporations 
  • Market Makers 

Investment Banks 

Investment Banks, which include include Goldman Sachs, Morgan Stanley, Bank of America, and JP Morgan play a significant role in the Options Industry. They commit their own capital and use experts to manage the risks. 

These Investment Banks create, package, and then distribute options products to their customers. The customers include insurance companies, investment funds, and retail investors. 

Investment Banks are also the largest providers of liquidity for exchange-traded options. 

Hedge Funds 

Hedge Funds are the most sophisticated investors in the world. They use investment products that range from stocks to bonds, currencies, swaps, convertible bonds, and options. 

Hedge Funds fall into three different Options categories: 

  1. Volatility Trading 
  2. Volatility as an Asset Class
  3. Directional Leverage 

1. Volatility Trading 

Volatility Trading involves buying and selling options based on mathematical calculations over a large amounts of trades. This type of trading requires intensive amounts of data, computing power, and expertise.

The Hedge Funds engaged in Volatility Trading include Citadel, DE Shaw, Two Sigma, and Jane Street. 

2. Volatility as an Asset

Over the last several years, Volatility has become a focus of institutional investors. These investors are looking for ways to use Volatility products to hedge their overall portfolio. 

This greater focus on Volatility has increased the popularity of products like the VIX and VXX. 

Hedge Funds and Retail investors also trade these products. In fact, Hedge Funds use these products in creative ways to hedge their portfolio. 

3. Directional Leverage

The majority of Hedge Funds use options for the leverage. Whether to protect a stock position, their portfolio, or to maximize potential gains, most Hedge Funds buy options and focus on the “direction” of the underlying asset (i.e. stock). 

Mutual Funds 

While Mutual Funds are known for holding a portfolio of stocks, a select few use options. Mutual Funds generally use two different strategies, selling options to generate income and buying options to protect their portfolios. 

Corporations 

Corporations use options to buy back company stock.

Years ago, Microsoft was one of the world's largest options users and sold options to a number of the Investment Banks as part of their Corporate buyback program.

In 2015, Home Depot announced an Accelerated Buyback Program with Barclays PLC Investment Bank. The bank structured a product where Home Depot would effectively buy their own stock back by selling options into the market.  

Market Makers 

Traditionally, Market Makers were humans trading on the exchange floors. However, computer trading has diminished their role over the last two decades. In fact, today, most market-making activity is done by computers.

The main function of a market maker is to provide liquidity to the options market. They are able to do this by trading options differently than today's average options investor.

Market Makers trade Volatility similar to the Hedge Fund Volatility Traders described above.

The Retail Investor

Now that you know who uses options on the institutional side, it's important to put into context the growing power of the retail side. In fact, options trading volume is now dominated by the average investor.

Breaking Records

While professional traders have enjoyed an advantage of speed and access over the retail trader, technology advancements has closed that gap. Today, millions of Americans use stock and options trading apps that provide similar tools used by the professionals at a fraction of the historical cost.

Not only is options trading more accessible to the average investor, the trading apps are easy to use. This has spawned a legion of options educators to pop up online willing to teach anyone that would listen.

This has led to record spikes in brokerage account openings during 2020, which ultimately led to surging options trading activity. To give some context, Options Volume records have been broken over the last 3 years.

Unfortunately, there's a serious problem looming.

At a Disadvantage

In the next few chapters, you'll learn why the available industrywide education is:

  • Confusing investors.  
  • Misdirected.
  • Incomplete.

I'll show you why it's the education that places the retail investor at a major disadvantage, which ultimately leads investors to significant losses over time. 

Sure, the retail investor understands how to press the buttons to make a trade. However, they fail to understand how to press the buttons in way that gives them a chance at long-term success.  

This lack of understanding is the driving force behind OptionsGeek’s groundbreaking education and a patented New Options Chain that helps investors finally shift the odds in their favor.