The Options Market Just Flashed a Bullish Signal for Stocks

If you thought that wild market speculation was a thing of the past... think again.

I don't often talk about options. They're a bit more complicated than stocks – which are typically the center of our focus. But it's important to keep tabs on the activity in the options market because it can impact what goes on with stocks.

And right now, options trading is booming.

Amateur investors are diving headfirst into 24-hour options. It's a sign of excitement. And while that's usually a reason to be cautious, it does suggest something interesting about today's bull market...

Generally speaking, traders use options to boost their returns over buying a stock outright. Each option contract represents 100 shares of stock. Options offer leverage, which means their value can soar when you get a trade right... or tank if you get one wrong.

A lot of folks appear willing to take that bet right now...

As you can see below, the average daily trading volume for options has exploded in recent years. In 2018, roughly 20 million options were traded per day. Today, that figure has soared to more than 40 million contracts...

That's surprising on its own. Options can be tricky to use successfully unless you have a lot of experience.

But what's even more surprising is that most of the options that investors are after these days have incredibly short life spans.

You see, options contracts have a predetermined expiration date. When you purchase one, you're making an agreement to buy or sell shares of stock at a predetermined price by a certain date.

Contracts with expiration dates further in the future are a bit easier to trade. They're not quite as volatile because the stock has time to move around before you're forced to act.

But as you can see in the chart below, nearly 50% of the contracts in the recent spike have an expiration date within five days...

A few years ago, these short-term options trades made up about a third of activity. So this is a big increase.

Clearly, folks are willing to gamble on near-term stock movements. But as I mentioned, it can be risky... You have to get just about everything right to earn a profit from a trade that close to expiration.

If you manage to bet correctly, you can make massive gains in the market.

But most of these short-term bets will go to zero. This isn't investing. It's more like gambling – like going to the casino and putting a bet on your favorite number at the roulette table.

The recent increase in options trading is likely the result of it becoming much more accessible over the past few years. You used to have to either make a phone call or log in to your brokerage account to place an option trade – after you received approval to do so, of course.

Today, many brokers offer options privileges quickly. And you can trade them using a simple smartphone app. So the barriers to entry have been lowered.

Because of that, I wouldn't count on this trend turning around right away.

This kind of excitement might seem ominous. But it could be a good thing for the broad stock market...

Speculation is a key component of a bull market rally. People tend to be more conservative during tough times, whether in the economy or the stock market. And that's obviously not the case here.

Traders have plenty of appetite for risk today. This could be a hidden sign that the bull market has a lot more room to run.

Here's to the future,

Matt McCall

Editor's note: Money has poured into a few specific stocks this year. The "Magnificent Seven" and the AI mania have led the rally. But if you feel like you missed the big gains – or if you're not sure whether it's safe to leave the sidelines – make sure you check out our recent presentation...

Matt and Brett Eversole teamed up to cover why this year's stock boom is way bigger than just a bear market rally... why history is in our favor... and how to position yourself now. You can watch it right here.

Further Reading

Investors love to speculate on IPOs. New and exciting companies attract a lot of attention. But they don't always live up to the hype – and that means they're also a common way for folks to get burned... Read more here.

Investors are feeling more optimistic. But after last year's declines, not everyone is hungry for risk. A lot of money is still flowing out of stocks – and pouring into safe havens like bonds. This means bullish sentiment has plenty of room to grow... Learn more here.