Robinhood earnings show investors’ love for options is growing (Video)

These are the takeaways from this morning’s review, which you can register receive in your inbox every morning along with:

One of the biggest changes in investing over the past couple of decades has been the rise in popularity of passive funds as more and more people follow Warren Buffett’s advice to log out of their accounts and just invest in the S&P 500.

And while that was happening, something else was happening on the other end of the spectrum. In the classic barbell design, risk tolerance becomes both smarter and riskier.

Options trading is reaching new heights of popularity—and it’s playing a growing financial role at brokerages like Robinhood. The company that just released quarterly results This week saw an increase in trading volume, and with it a significant jump in options income.

As you can see in our chart of the week, that figure was $202 million in the third quarter—and that doesn’t include stock trading revenue.

Robinhood’s innovative free trading changed the brokerage industry by making free transactions ubiquitous. And with a key barrier to action gone, price-sensitive retail investors jumped in, likely helped by stimulus measures. As trading has grown significantly, investors have also begun to explore derivatives and margining.

“Retail market participation in options trading has risen sharply during the pandemic, peaking at 48% in July 2022. Although it has fluctuated since then, it reached 45% in July 2023.” wrote NYSE Research Director Stephen Poser late last year. “This data suggests that significant retail options trading is expected for the foreseeable future.”

At the same time, Robinhood constantly insisted that it was a place for index fund investors to pick and forget, which was also true. Eat evidence that its retail investors also helped stabilize the market during the 2020 pandemic crash by buying dips in the S&P 500.

However, these two things are very different. While the S&P 500 is made up of volatile stocks that fluctuate wildly and require a high tolerance for risk, there’s no arguing that investing in them is an investment. If there are wounds, time will almost certainly heal them.

But options trading, while traditionally used to hedge risk, is an easy way to speculate and bet with high risk and high payout. And as with some types of leveraged investing, the downside can be endless. As the Merrill Lynch website notes, “If you write a naked call, you face unlimited potential losses because there is no limit to how high the stock price can rise.”

Options Trading and Bitcoin Growth – Coinbase Transaction Income almost doubledwas announced in the quarterly this week—coincides with the rise of sports betting, which, newly legalized, is having a cultural moment as people explore fandom through a money horse in a race.

And this week, Robinhood may have shown us where it could go next: its customers can now place your bet directly about the results of the US elections.

Ethan Wolf-Mann is Yahoo Finance’s senior newsletter editor. Follow him on X @ewolffmann.

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