The Options Explosion — And How You Win As Traders Lose
The speculation "Gold Rush" — and the company that takes a piece of each trade ...
I was at a dinner meeting not long ago … and one of the dessert offerings was some latent volcanic sugar eruption called “Death by Chocolate.”
I’ll tell you folks … I was tempted.
Really tempted.
I mean … I love chocolate. I knew this would taste great — and that I’d get a giant sugar rush that would feel awesome.
Until it didn’t.
As my Dad used to say, too much of anything can be bad.
Even a “good thing” — like chocolate.
And when it comes to “bad things” — as First Lady Nancy Reagan used to tell us — well: “Just say no.”
Especially with addictive “bad things.”
Like drugs … or reckless wagering.
Or options speculation.
When it comes to speculative options — with apologies to Nike Inc. NKE 0.00%↑ , and that company’s ultra-classic marketing slogan: “Just … don’t … do it.”
WEALTH BUILDER/WEALTH KILLER
You’ve heard me say this … and you’ll hear me say it again.
As investors go … you’re either a Wealth Builder … or a Wealth Killer.
If you’re not one … you’re the other.
There’s no in-between.
I’ve been doing this for a long time …
So I’ve done a lot. And I’ve seen a lot.
And one thing I’ve seen here, of late, is that a new gambling affliction — I’ve dubbed it the “DraftKings Mindset” — has infected the retail “investing” markets.
And I do mean infected — with ruinous consequences.
Investing newsletters, so-called “master classes” and other “organizations” have come up with all sorts of odiferous “investments” or “products” – most of them targeting retail investors who are vulnerable … or desperate.
I’m talking about “products” like:
Special-purpose acquisition companies (SPACs).
Sketchy cryptocurrencies.
So-called algorithmic trading — or any trading, for that matter.
The potential for 24/7/365 trading on the New York Stock Exchange (NYSE).
Cringey “money-sponges” re-labeled as private-company investments (not the good kind, which are okay … but holes-in-your-pocket disguised as their more-reputable cousins).
So-called “income strategies” that are actually high-risk options products with shiny wrapping paper.
And easy-to-access options — including “zero-day options,” which are option contracts that expire on the same day someone trades them.
Each of these are pitched as innovations that make life better, easier and more profitable for retail investors. But most of them just paint a bullseye on your back: They turn you into the proverbial “Greater Fool” — and just set you up to take the “other (losing) end” of some smart operator’s moneymaking trade.
In short, they turn you into a Wealth Killer.
All of them.
But the options stuff is the absolute worst.
So if anybody comes to you with a pitch for an options-trading “product” or “service” or “strategy,” be sure to look down while they’re talking – to see if they have their hand in your pocket.
Because you can bet that they do.
For most retail investors (and by “most,” I mean 99%), options trading is for Wealth Killers … not for Wealth Builders — and I don’t care what Malarkey-filled pitch any of those “Derivatives Devotees” are giving you.
Still want to make a wager?
Here’s your best bet …
If you see an options contract, run in the other direction – as fast as you can.
That’s your best move: And I can prove it.
THE “BIG T”
Since 2010, one of the biggest Wealth Killers of all is the “Big T” — trading.
And very specifically … options speculation.
According to a Bloomberg report with data from the Futures Industry Association, options trading zoomed 478% from 2013 to 2023.
In a report from S&P Global Market Intelligence, researchers found that options trading by retail investors climbed more than tenfold from 2010 to 2020 — from $20 billion at the start of that decade-long stretch to $240 billion by the end.
It got even worse during the pandemic, says Eric So, a professor of accounting and finance at the MIT Sloan School of Management, who researched options trading by retail investors.
“Folks were home and bored and looking for something to do,” Prof. So told an interviewer. “Many people who would normally gamble on sports decided to take their money and gamble in stocks and options. So there was a perfect storm of events that led to retail investors having an outsized role in the markets.”
An “outsized role” … which led to “outsized losses,” says that MIT study: Losing is Optional: Retail Option Trading and Expected Announcement Volatility.
Between January 2010 and February 2021, retail investors lost more than $3 billion, according to that study.
Those losses will continue; in fact, they’ll accelerate.
There are lots of additional possible explanations for this surge.
First, there was all that cheap stimulus money — which folks looked at as “free,” making it okay to speculate with.
There are also new apps that make options easier to access and simpler and cheaper to trade.
There’s also a new mindset at play — thanks to the proliferation of online betting, which seems to have made speculative trading “acceptable.”
But “acceptable” doesn’t mean “smart.”
And new “products” like those “zero-day options” are inflicting new damage: A study from Germany’s University of Muenster found that – since May 2022 — day-traders lost $358,000 each and every market day on those small-window, high-risk/high-return trading instruments.
I’ll grant you: Some retail traders have scored with options. But it’s a small group.
Tiny … even microscopic.
A good friend of mine — a former “sell-sider” on Wall Street whose got deep knowledge and deep connections related to trading — says options speculation is actually a rigged game in which retail investors are nothing more than an “easy mark” for sophisticated hedge funds and other trading pros.
“Your ‘Wealth-Killer’ theory is correct here, Bill,” my friend said to me (yet again) not long ago. “The vast majority of Mom-and-Pop investors — and I’m talking 99.7% – have absolutely no business going anywhere near options of any type. For retail investors, speculative options are a rigged game … clear and simple.”
Options trading is a losing strategy for most retail “speculators.” They’re not for us. And that makes them a strategy for Wealth Killers that you should ditch today.
Better still: Turn yourself from a “Wealth Killer” into a “Wealth Builder” — with an options strategy that’ll never have you placing a “put” or “call” trade.
THAT “ONE STOCK”
Instead of losing money on options yourself, you can make money from everyone else who trades options by grabbing shares of CBOE Global Markets Inc. CBOE 0.00%↑ — the largest options exchange in the world.
CBOE offers options on more than 2,000 companies, 22 stock indices, and 140 ETFs and (in general) generates revenue via transaction fees.
Not only was the 3.7 billion options contracts traded last year a record for CBOE; it also represented the fourth straight year that options volume on that exchange hit a new high.
This is “Wealth-Builder” thinking: No matter what happens with each options trade — “win, lose or draw” — owning CBOE puts you on the winning side because you’re guaranteed to get a piece of each trade.
In other words, if retail investors view this explosion in options trading as some kind of “New Options-Trading Gold Rush,” then owning the exchange is the Ultimate Pick-and-Shovel Play.
Indeed, the proof is in the results, which you can see in CBOE’s stock-price performance over the last five years, where it’s absolutely clobbered the Dow Jones Industrial Average:
SHAREHOLDER FRIENDLY
When we first told you folks about CBOE earlier this year, the stock was in the low $180s. But for Wealth Builders, you can still like it here in the $214 range — if you’re willing to embrace an “Accumulate” strategy.
CBOE’s SPX options are the mostly actively traded index options in the U.S. market; big institutions use them to manage risk and use them for exposure to the big-cap S&P 500.
And the company is particularly shareholder-focused.
Back in August, CBOE boosted its quarterly dividend 15% – from 55 cents a share to the current 63 cents. This is the 14th straight year CBOE has boosted its dividend – and brings the yearly payout to $2.52, a 1.18% yield at current levels.
The company has boosted its dividend at a compound annual growth rate (CAGR) of 12.2% since 2017.
Return on Equity (ROE) – that good-old profitability metric that tells us how efficiently a company uses shareholder money – was 22.5% over the trailing 12 months. That’s an increase of 50 “basis points” (a half a percent) year over year. And it trounces the industry average of 13.2%.
That shareholder “friendliness” — in which the company returned 65% of its adjusted earnings to shareholders — isn’t confined to dividend increases.
It’s also doing buybacks.
In tandem with its dividend boost, CBOE said it will repurchase another $500 million worth of its shares. Since launching its buyback program in 2011 (through June 30 of this year), the firm has repurchased $1.6 billion of its shares — which means its program is accelerating.
And there’s cash to keep that going: In the first six months of this year, cash flow (CF) from operations surged more than four-fold to hit $2.4 billion.
At the 2024 midpoint, CBOE had cash and equivalents of $614.6 million – a jump of 13% from year-end 2023.
I love this: All that cash gives CBOE the “raw material” for expansion investments, technology upgrades, buybacks, dividend boosts and more. It also gives the company a nice “margin of safety” to navigate tough stretches.
But the near-term outlook is bullish — maybe super bullish – because of next week’s U.S. presidential election … and its aftermath.
Just last week, strategists at Morgan Stanley Wealth Management said that the 2024 election "may be particularly volatile, given the potential for delayed election results as well as macroeconomic and geopolitical concerns."
The 2020 election saw the CBOE Volatility Index (also known as the “Fear Index,” or the VIX) spike 40%.
That “election intrigue” is partly why Piper Sandler this month reiterated its “Outperform”rating and ratcheted its target price from $210 to $220.
Oppenheimer raised its target from $209 to $227 – citing the buybacks and potential for overseas growth as “triggers.”
On Oct. 21, Investor’s Business Daily made CBOE its “IBD Stock of the Day.”
There you have it: As options speculation explodes, here’s the one company that wins — even when traders lose.
For the record: I passed on that chocolate “trifle.” And I avoid options with all my being.
See you next time;
