There has never been a better time to be — or become — an options trader.
Unlike traditional Vegas-style games of chance, the more people there are at the options-trading table, the merrier. Options trading is one of those games in which the more players there are, the more money there is to be made — there’s room for everyone at the table to make as many profits as they can with this exciting investing and trading tool.
Just how popular has options trading become? Let’s put it this way: In 2006, a whopping 2 billion option contracts cleared through the Options Clearing Corp. In 2007, it took less than 10 months for 2 billion contracts to change hands. And more than 2 billion options contracts changed hands in the first half of 2008 alone!
Compare that with the early 1970s, when options first started trading, and we all thought that a few thousand contracts changing hands in a year was an impressive figure!
More players serve to make the game not only more exciting, but also more fair. Think of it as strength in numbers.
Having a number of options exchanges — there are a half-dozen in the United States, with the Chicago Board Options Exchange (CBOE) being the largest — helps us as traders to get the best-possible prices for an option. For instance, if you’re interested in buying the XYZ January 50 Calls and you estimate that paying $1 per share ($100 per option contract) is a fair value for them, you can tell your broker (via a limit order) to try to buy those calls for you for $1 or better.
If there isn’t a lot of demand for these options, they might only be traded on one or two of those exchanges … which means the market-maker might over-inflate the price he’s willing to accept for the sale of those calls.
But if the calls are trading on four or five of the exchanges, your broker will try to get you in at the best-possible price because the market-maker would rather make the sale to you at a few cents cheaper than he would have liked than lose out altogether to a competitor.
However, it is the market-maker’s right to not honor your price if someone else is willing to pay up, so keep that in mind.
But can a market-maker ever run out of options? Not necessarily, because an option’s open interest — which reflects the number of people who want to be in a particular trade — expands to accommodate demand. As long as there is a buyer available for every seller, and vice versa, trades can be made practically into perpetuity.
Sure, the higher the stock trades — and the higher the demand for shares and its in-, at- or out-of-the-money options — the higher its option value will go.
It works to your advantage when the price runs up and you’re already holding the option long in your trading account, because the goal is to cash out at a (much) higher price than you paid.
And if that isn’t reason enough to want to have as many people trading options as possible, then I don’t know what is!
