The Risks of Retail Options Trading for Investors

Retail options trading is often a losing game for most investors, driven by speculation and high transaction costs.

### The Risks of Retail Options Trading: A Cautionary Tale
* 📏 It's important to correct a misconception about my height, as I am actually **6'10 or 6'11 with hair**, contrary to what was stated in a recent video by Patrick Bole.
* 💰 A notable case involved an options trader who turned **$88,000 into $415 million** but lost it all by 2022, leading him to sue his bank for **inadequate financial advice**.
* 📉 I caution against relying on banks for financial advice, as they often **promote their own products** rather than genuinely beneficial options.
* 📊 Options trading can be a "**losers' game**" for most retail investors, with **over 75% of trades resulting in losses**, making it akin to **gambling** rather than a sound investment strategy.
* 📈 Research indicates that exposure to successful traders can lead to **increased risk-taking among retail investors**, further exacerbating their **losses in the options market**.
* 📉 A 2023 study revealed that retail investors often trade **risky options with high bid-ask spreads**, resulting in **substantial financial losses**, especially during speculative frenzies like GameStop.
* 🧩 Retail investors are often unaware of the **high transaction costs** associated with options trading, which can lead to average **losses of 5-14%** due to poor trading behaviors.
* 💡 Ultimately, building wealth requires **consistent saving and investing in a diversified portfolio**, rather than chasing quick gains through options trading, which is more likely to lead to **financial ruin**.

Before I start the video, I want to address an error made by Patrick Bole, who, other than this oversight, I generally have tremendous respect for. In a recent video, Patrick portrayed me as being shorter than Tony Robbins. Tony Robbins is 6'7. I'm 6'10, 6'11 with hair. Patrick, please do your research. An options trader, well, a carpenter who successfully traded options for a while in British Columbia, incredibly turned $88,000 into $415 million between 2019 and 2021. But by 2022, his account was worthless. He's suing RBC and an accounting firm for not having given him better financial planning advice. That lawsuit is not what I want to talk about, but I will mention that caution is always warranted when taking financial advice from a bank. Banks will sell you bank financial products. What I want to talk about is retail options trading, also known in some circles as degenerate gambling. I'm Ben Felix, portfolio manager at PWL Capital, and I'm going to tell you why.

trading options is a losers' game for most retail investors most of the time. Options are financial contracts that give the option holder the right but not the obligation to buy or sell a set quantity or dollar value of an asset at a fixed price by a set date. They are useful tools for many reasons, and the technology and its underlying mathematics have arguably revolutionized the economy and changed the world. While they can be used for good, some of their features, like embedded leverage, make them a double-edged sword. They can just as easily be used for responsible risk management and hedging as they can be used for speculation and gambling. Unfortunately, the majority of retail activity in options markets looks a lot more like gambling, but that doesn't stop retail investors from trading options. If anything, it seems like the speculative nature of options trading is the reason that retail investors are active in these markets, and it's only been getting worse as online options trading platforms aggressively market option trading to retail investors. Some combination of commission-free trading, high profits for brokerages, financial

influencers, easy online trading, gamification, and the meme stock phenomenon have come together to turn retail trading into a large part of the options market. There are incredible stories like the RBC client, at least on the way up, and Roaring Kitty, the guy behind the GameStop saga, that make trading to extreme wealth seem possible. This is probably not a good thing. Experimental research suggests that when people observe successful traders, they increase their own risk-taking. That research placed participants into a trading environment with a starting amount of capital and allowed them to trade over two trading rounds. After the first round, participants in the experimental condition were shown the performance of the top three participants, while those in the control group were not. The authors find that traders exposed to their top-performing peers tend to take more risk, trade more overall, and be less satisfied with their own results. The same thing happens online in real life. Successful traders post their wins for everyone to see, making it seem possible for everyone else watching. Social influence and comparison are likely part of the

problem, but it doesn't help that retail-focused trading platforms promote options trading to their customers often pretty aggressively. I've seen ads that make trading options sound easy, smooth, and smart in an effort to compel users onto an options trading platform. This is no mistake; retail options trading is profitable for the brokerages facilitating it. Brokerages promote options trading to their customers as a way to boost profit potential, but I wonder whose profits they're really talking about. In reality, retail options traders have lit huge amounts of their own money on fire by trading options. For example, a 2023 paper in the Journal of Finance estimates that the aggregate portfolio of retail investors lost $2.1 billion from November 2019 to June 2021. This finding is not unique or unexpected. A 2022 paper simulates returns from an empirical distribution of option trades and compares them to stock trades. The authors find that returns on options trades have considerably higher volatility and are extremely skewed, with some very rare but incredible outcomes.

like the examples I mentioned earlier, but the majority, over 75% of options trades, lose money, and over half of the option portfolios in the simulation lose more than 90% of their value. This is the reality. It's kind of like a lottery. There are a few big winners, but the vast majority of retail options traders and the average retail options trader loses money. Another study on 68,000 trading accounts and more than 8 million trades in stocks and options at a large online broker in the Netherlands similarly finds that most investors take significant losses on their options trades, much larger than the losses they take from equity trading. The authors also demonstrate that retail investors do not use options for hedging their underlying stock positions, and that single men with low incomes and little investment experience trade the most. Together, this suggests that gambling and sensation-seeking rather than hedging are why people are trading options. Guys, get a less expensive hobby, go outside. In case there was any doubt that options trading is being treated like a casino by retail investors, a 2023

paper in the journal Finance finds that 50% of retail trades in their sample are in risky options with less than a week to expiration, with an average quoted bid-ask spread of 12.6%, and they lose money on average. Retail investors in their sample strongly prefer call options to puts. They trade mostly at-the-money or slightly out-of-the-money options, which have especially high trading costs, with an average quoted bid-ask spread of 29%. They typically trade small amounts, and they prefer options on attention-grabbing stocks. They also document that retail activity in both call and put purchases increases significantly during retail investor frenzies like GameStop and other meme stocks. The authors again suggest that this is evidence of retail investors having speculative rather than hedging motives behind their trades. A 12.6% or 29% bid-ask spread is a very high transaction cost to overcome, but the high cost of retail options trading will not always be obvious to the retail trader. Brokerages promote zero or low commissions on their options trades, but

those explicit costs are only one component of the cost of trading. A 2022 study using a data set from the NASDAQ stock market finds that retail investors display three wealth-depleting behaviors when trading options. They overpay for options relative to realized volatility, they incur enormous bid-ask spreads, and they sluggishly respond to announcements. These behaviors translate to losses of 5 to 9% on average and 10 to 14% for high expected volatility announcements. A 2021 study on the South Korean options market shows that retail investors generally prefer simple option strategies, which provide directional exposure to the underlying asset, and they tend to lose on their trades. Even the top 30% of retail investors lose money in the options market in the South Korean sample. Options trading platforms have more recently started offering complex multi-leg options. A 2023 study finds that retail trades in complex options return negative 16.4% over 3 days on average, with losses increasing with complexity. The findings suggest that retail investors may not fully

understand the risk-return trade-offs in complex option strategies and that they're lured in by leverage and the potential for lottery-like payoffs despite some incredible success stories, which we should expect in the distribution of options trading outcomes. Trading options has generally been a disaster for retail investors, which we should also expect. Retail investors typically use options for speculative trading, pay high transaction costs, and lose money. All of these negative effects are amplified when investors are shown a successful trader's outcome, which in the world of social media is pretty easy to find, even when in reality most people are losing money. I think it's also problematic that maybe other than this video, you wouldn't hear any of this if you tried to learn about trading options on YouTube. Most of the videos I could find are telling you how to trade options, how much money you can make trading options, and how to sign up for their course. I'd bet that most of the people behind those videos have not read the papers showing how poorly trading options tends to perform for retail.

investors just take a minute to think about it. Financial markets are highly competitive. Retail investors do not have the same resources, information, or knowledge as institutions, and they're more prone to behavioral biases. When you trade, you're interacting with sophisticated market participants who want to make profits at your expense. Based on the research mentioned in this video, the options market seems to be one of the worst places for retail investors to trade and one of the best places for institutions to profit off of retail investors. Always remember, when you're having dinner with lions, make sure you're at the table, not on the menu. For most investors, building wealth is not something that happens with one big winning trade or even with a series of winning trades. It's a long and boring process that consists of saving and investing in a diversified, low-cost portfolio. Chasing big wins by trading options is more likely to destroy wealth than to create it. Thanks for watching. I'm Ben Felix, portfolio manager at PWL Capital. If you want to learn more about how PWL helps Canadians grow their

Wealth without trading options. You can book a meeting with us below.

Why You Will (Probably) Lose Money Trading Options

I post videos on investing, financial decision-making, and living a good life.

My name is Ben Felix. I am a Portfolio Manager and the Head of Research at PWL Capital. I am a CFA charterholder and CFP professional. I am securities licensed in Canada by CIRO.

All channel content is produced and owned by PWL Capital Inc.


Ben Felix

Patrick Bole mistakenly portrayed the speaker as shorter than Tony Robbins.

An options trader in British Columbia turned $88,000 into $415 million but lost it all by 2022 and is now suing for better financial advice.

The speaker, Ben Felix, warns that retail options trading often resembles gambling and is a losing game for most investors, despite the potential benefits of options.

The Impact of Influencers and Gamification on Retail Trading

Influencers, easy online trading, and gamification have significantly increased retail trading's role in the options market.

Successful traders' stories and aggressive promotion of options trading by brokerages create a risky environment for retail investors.

Despite the allure of quick wealth, retail options traders have collectively lost billions, with the high volatility and skewed returns of options trades contributing to their struggles.

The majority of options trades result in losses, with over half of portfolios losing more than 90% of their value.

A study of 68,000 trading accounts shows that retail investors take larger losses on options trades compared to equity trading, and they are more likely to be single men with low incomes and little investment experience.

The trading patterns of retail investors, including a preference for risky options and attention-grabbing stocks, suggest that gambling and sensation-seeking, rather than hedging, are the primary motives behind their options trades.

Retail investors exhibit three detrimental behaviors when trading options: overpaying, incurring high bid-ask spreads, and responding slowly to announcements, leading to average losses of 5-9%.

Simple option strategies dominate retail investors' choices, yet even the top 30% struggle to make profits.

The shift to complex multi-leg options has resulted in even greater losses, with a negative 16.

4% return over three days on average, highlighting the common pitfalls and misunderstandings in options trading for retail investors.

The Challenges for Retail Investors in Financial Markets

Retail investors face significant disadvantages compared to institutions, lacking resources, information, and knowledge.

The options market is particularly unfavorable for retail investors, providing institutions with opportunities to profit at their expense.

Building wealth is a long-term process that requires saving and investing in a diversified, low-cost portfolio, rather than chasing big wins through options trading.