Robinhood Options Trading: Profits, Stock Market Swings, and Now—New Scrutiny

Feb 4, 2021

$27,801/$300,000 (9.3%)
Scott Eisner, Robert Schaffer

Observations & Insight

Nasdaq Weathered a “Perfect Storm” in 2020, Led Exchanges in Single Stock Options Volume
Matt Raebel – John Lothian News

While major world events can cause ripple effects in the markets, the effects of the ongoing pandemic have felt more like a series of earthquakes. The year 2020 was an historic one for many reasons; in Nasdaq’s case, it was also the first year that it led all exchanges in total volume traded for equity options.

Options traders had already anticipated that 2020 would be a rocky year even before the pandemic kicked into high gear. The U.S. presidential election was expected to cause significant volatility in the markets between October and December. Nasdaq’s options markets processed 365 million trades consisting of 2.58 billion contracts. A lot of that came from brokers and hedge fund managers scrambling to adapt to fluctuations in the market caused by a myriad of factors, including increased retail trading activity, by hedging their downside risk – and there were a lot of downsides in 2020.

To read the rest of this story, go here.


Ed Tilly – The Path To Electronic Trading

In a recent Zoom interview with John Lothian News for the JLN MarketsWiki Education Path to Electronic Trading series, Cboe Global Markets Chairman. President and CEO Ed Tilly shared the story of his start in the options industry and how that led him on a path towards electronic trading.
Tilly started at the Cboe in 1987 as a clerk working for legendary futures and options trader Steve Fossett. He spent time learning the business from Fossett and his team and finally became a trader for Fossett.

Watch the video »

Lead Stories

Robinhood Options Trading: Profits, Stock Market Swings, and Now—New Scrutiny
Annie Massa and Sarah Ponczek – Bloomberg
As one beleaguered stock after another suddenly soared in January, so too did queries on Google: “How to trade options on Robinhood.”
Robinhood Markets’s options-trading platform, barely three years old, is charting a meteoric rise in the Covid-19 pandemic, establishing the firm as the venue of choice for throngs of retail investing enthusiasts.

Reddit’s Power to Push Stocks Down Is the Next Worry for Traders
Yakob Peterseil – Bloomberg
The dust may be settling on the Reddit madness, but the sudden rise of this disruptive cohort is causing some stock-options traders to ask: What if the retail army decide to do it all again, by forcing prices down instead of up?
It’s a tail risk few institutional pros had considered until last week’s market drama when day traders pounded hedge funds by bidding up their most-shorted stocks.

Exchanges and Clearing

Robinhood Crisis Reveals Hidden Costs in Zero-Fee Trading Model
Misyrlena Egkolfopoulou and Sarah Ponczek – Bloomberg
Turns out, no-fee stock trades can exact a very high price after all.
Not only for the retail traders sitting on deep losses speculating on meme stocks, or for Robinhood, which faces recriminations for “gamifying” the frenzy that spun out of control and was forced to scramble for billions in fresh cash, but also for the stock market itself, which must reckon with the wild swings that have little bearing on fundamental value.

*****JB: Shocker – free things are not free.

Cboe Global Markets Reports January 2021 Trading Volume
Cboe Global Markets, Inc.
Options ADV up 48 percent, U.S. Equities – Exchange ADV up 85 percent and Global FX ADNV up 5 percent over January 2020; Cboe’s four options exchanges combined set a new single-day volume record with 18.5 million contracts traded; Cboe EDGX Equities Exchange set new monthly total volume record with nearly 23 billion shares traded
Cboe Global Markets, Inc. (Cboe: CBOE), a market operator and global trading solutions provider, today reported January monthly trading volume.

Euronext announces volumes for January 2021
Euronext, the leading pan-European market infrastructure, today announced trading volumes for January 2021.

Regulation & Enforcement

Exercise Cut-Off Time for Expiring Options
FINRA reminds members that option holders who hold expiring options have until 5:30 p.m. Eastern Time (ET) on the day of expiration to make a final exercise decision to exercise or not exercise the option.1 Members may establish an earlier time to accept exercise instructions for customer or non-customer accounts but may not accept instructions after 5:30 p.m. ET.2 Members should ensure customers are aware of the cut-off time to exercise expiring options.

The SEC is hunting down possible misinformation on social media posts for signs of fraud in Reddit-driven trading frenzy, report says
Shalini Nagarajan – Markets Insider
The Securities and Exchange Commission is scanning through social media posts for signs of possible fraud in frenzied trading of hot stocks like GameStop and AMC, Bloomberg reported.
The regulator’s investigation is happening alongside a scrutiny of trading data to evaluate whether some posts were aimed at deliberately manipulating share prices, the report said.

Robinhood Faces Civil Lawsuits Over Trading Restrictions
Mengqi Sun – WSJ
Robinhood Markets Inc. is facing more than 30 civil lawsuits in relation to trading restrictions imposed by the online brokerage that temporarily limited purchases of certain securities last week, according to court records.
Several groups of individual investors and users of the mobile trading app have filed separate lawsuits in federal courts in New Jersey, Florida, California, Texas and other states alleging that Robinhood and its subsidiaries, by imposing restrictions on its platform, violated various laws, including breach of contract and fiduciary duty.

Changes Are Coming to Financial Regulation. What It Means for Investors.
Eleanor Laise – Barron’s
Whether you invest in oil-and-gas companies or trade Bitcoin, financial regulation under the Biden administration will make its mark on your portfolio—and may even change the way you invest.
Regulatory actions on the horizon are likely to give shareholders access to new data to aid their decision-making about companies, including mandatory disclosures of climate risks and board diversity. Rule changes could also give them a louder voice in corporate-governance discussions.

CME Group Inc. Names Slate of Director Nominees
PR Newswire
CME Group Inc. today announced its slate of candidates for its board of directors for election at the company’s annual meeting to be held Wednesday, May 5, 2021.

Yellen Vows to Probe Market Mania, in Consumer-Protection Test
Christopher Condon – Bloomberg
Treasury Secretary Janet Yellen pledged to examine the recent frenzy in financial markets in an effort to ensure investors are protected, signaling the new administration’s focus on consumer financial interests after years of emphasis on deregulation. “We really need to make sure that our financial markets are functioning properly, efficiently and that investors are protected,” Yellen said in an interview Thursday on ABC television’s “Good Morning America” before she leads a snap meeting of top regulators later in the day. “We’re going to discuss these recent events and discuss whether or not the recent events warrant further action.”


ISDA Selects Kinetix and Linklaters to Develop Documentation User Platform
The International Swaps and Derivatives Association, Inc. (ISDA) has today announced that Kinetix Trading Solutions and Linklaters have been selected to develop a user platform that will allow market participants to access ISDA documentation in electronic form with enhanced navigation and other features.
Kinetix, a financial technology company specializing in artificial-intelligence-driven trade management and compliance software, and Linklaters >Nakhoda were selected following a request for quotation issued in June 2020 for the development of a user-friendly, state-of-the-art platform that will enable industry participants to more easily navigate and use ISDA’s documentation.

OKEx to integrate the Bitcoin Lightning Network, enabling cheaper and faster transactions for users
OKEx (, a world-leading cryptocurrency spot and derivatives exchange, is thrilled to announce the integration of the Bitcoin Lightning Network, a second-layer scaling solution based on the Bitcoin blockchain, in the coming quarter. This major development will dramatically decrease transaction fees and times, improving user experience on the exchange. Lightning integration also highlights OKEx’s deep commitment to deep commitment to bringing the most advanced Bitcoin technology to the world — and furthering the development of the Bitcoin ecosystem.


How to Use Options to Juice Your Portfolio—While Dodging Land Mines
Steven M. Sears – Barron’s
It would be all too easy to cluck our tongues over GameStop’s wild ride up and down the past two weeks—and to snicker over Reddit’s WallStreetBets traders. It’s much better to lay out some rules for self-directed investors to help them be better stock and options investors.
Our previous primer—”New to Options Trading? Here’s How Not to Make a Fool of Yourself” (Sept. 17, 2020)—was based on using options to better control stocks. That remains our recommended approach. But we recognize that many people use options to engage in relatively low-cost, aggressive momentum trading. Hedge funds do it every day, and now John and Jane Investor have joined the party.

Opinion: Watch the warnings coming from the stock market’s sell signals
Lawrence G. McMillan – MarketWatch
The stock market suffered some damage through the week ending Jan. 29, but it has rebounded strongly this week. Part of that rebound is due to a seasonally bullish trend near the end of January, where institutional money managers put cash to work. But that seasonally bullish period ended with the close of trading Wednesday, so the market does not have that wind at its back any longer.


Registration is open! – FIA Boca 2021

Save the Date – April 28 & 29
The Options Industry Conference is Going Virtual in 2021
Join OCC and the options exchanges for the 39th annual Options Industry Conference, April 28-29, 2021. While the conference will be held virtually for the first time in history, the focus will continue to be the key topics facing the options industry today, from the regulatory shifts in the U.S. and Europe to the technological developments that are driving monumental change in markets around the globe.


How to Make Sense of GameStop? The Internet Turns to Beer and Puppets
Julia Carpenter – WSJ
To help explain the complexities of the GameStop market frenzy, Brianna Parkins turned to two tall cans of Guinness, a sad-looking gray dog puppet and a pile of candy.
In her series of short TikTok explainers, Ms. Parkins casts the puppet as a hedge-fund manager looking to short a can of Guinness, reaping profits (that would be the candy) along the way. A white plaster statue enters the scene—representing the popular Reddit forum WallStreetBets—and buys up not one, but two cans of Guinness. “This is bad news for your hedge funds,” she says, waving the puppet to the camera.

*****JB: I’m willing to bet everyone reading this newsletter understands what happened just fine. It’s just not often you see it explained with beer and puppets.

(Podcast) OBC 121: The GameStop Aftermath
Options Boot Camp – Options Insider Radio Network

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