An Anatomy of Retail Option Trading

Abstract
The recent surge in retail option trading has sparked concerns about gambling and significant losses. We study a novel account-level dataset of about $20 billion in retail trades over 2020 to 2022 to show that these concerns may be exaggerated. Option trades account for nearly half of all trades in 2022 and thus are a vital part of retail trading. Despite wide bid-ask spreads, retail investors see minimal losses on option trades. Although options theoretically resemble lottery tickets, we find little evidence of positive skewness in realized dollar profits, contradicting gambling-driven trading. Many retail investors trade options because of high leverage and low option prices; option trades are concentrated in a few high-priced underlyings, while stock trades are much more dispersed. A typical retail trade is the purchase of a one-day S&P 500 index call. Overall, we provide the first comprehensive account of modern retail trading in the U.S. options market using trader-level data.