America's Options Mania: If The House Always Wins, Own The House

A gambling mania — I’ve dubbed it the “DraftKings Mindset” — has infected the U.S. financial markets.

It’s a mentality that’s first took hold in the online-betting realm. But it’s “mutated” into online trading, where more and more of the players are using longshot options to make increasingly risky wagers.

They’re betting … and they're losing — hundreds of millions of dollars a year. That’s the “emotional calculus” of a long shot: Because they see the massive payoff potential, it’s easy to ignore the almost-microscopic chance of winning.

This speculative trading is becoming “acceptable,” but acceptable doesn’t mean “smart,” as you’ll see in a minute.

And now this “DraftKings Mindset” is infecting the retail investor.

The fact is, Americans love to bet. And they love to bet now more than ever before, says the daily business newsletter Morning Brew.

That’s right, folks: Americans who once bought blue-chip stocks (and reinvested the dividends) and who flowed their hard-earned savings into the ETFs in their 401(k)s have become options-trading gamblers.

And like the many gamblers who came before them, they are losing money … lots of money.

According to the MIT study, Losing is Optional: Retail Option Trading and Expected Announcement Volatility, between January 2010 and February 2021, retail investors lost more than $3 billion.

That’s a staggering amount. If someone handed you $3 billion, and told you to spend $1 million a day, you’d have an eight-year, 80-day run before ended up broke.

And it’s going to get worse.

There are lots of possible explanations for this surge.

First, there was all that cheap stimulus money during the COVID-19 Pandemic — which folks looked at as “free,” making it okay to “play around with.”

There are also new apps that make options easier to access and simpler and cheaper than ever to trade.

And for new investors, they fear they’re doing something wrong or missing out if they’e not trading options.

New “products” (like “zero-day options”) are also inflicting new damage: A study from Germany’s University of Muenster found that — since May 2022 — day-traders lost $358,000 each and every market day on those longshot trading instruments.

Look … I’m sure that some retail traders have scored with options. And maybe scored big.

But it’s a microscopic group.

And for most investors, the simple reality is that options trading is nothing more than a gamble designed to separate you from your hard-earned money.

There’s a “truism” about gambling: The odds are stacked in favor of the casino, known as “The House” in industry parlance.

But there’s another option (pun intended).

If you know that options trading is just another form of gambling …

If you know that gambling is a rigged game …

And if you know it’s a game that “The House” always wins.

Then don’t gamble.

Because that, my friends, is the kind of high-probability, move the like-minded thinkers of the Stock Picker’s Corner (SPC) community look to make.

Here’s how you do it …

If You Can’t Beat the House, Own a Piece of It

Instead of losing money on options yourself, you can make money from everyone else who trades (and loses money on) options … by grabbing shares of CBOE Global Markets Inc. (CBOE) — the largest options exchange in the world.

CBOE offers options on more than 2,000 companies, 22 stock indices and 140 ETFs. In general, it generates revenue via transaction fees on all of that.

And not only were the 3.8 billion options contracts traded in 2024 a record for CBOE; that also represented the fifth-straight year that the exchanges options volume hit a new high.

This is “Wealth-Builder” thinking: No matter what happens with each options trade — “win, lose or draw” — owning CBOE puts you on the winning side because you’re guaranteed to get a piece of each trade.

The proof is in the results, which you can see in CBOE’s stock-price performance over the last 10 years; its 257.5% gain has absolutely clobbered the 151.8% gain of the Dow Jones Industrial Average.

CBOE’s SPX options are the most-actively traded index options in the U.S. market. The reason: The big financial institutions use them to get exposure to the big-cap S&P 500 and to manage risk.

And CBOE just announced plans to expand U.S. stocks trading to a 24/5 format, meaning investors can trade stocks round-the-clock every weekday.

“We continue to hear from market participants globally — particularly those in Asia-Pacific markets like Hong Kong, Japan, Korea, Singapore and Australia — that they want greater access to U.S. [stocks] trading and need trusted venues that offer transparency, robust liquidity and efficient price discovery,” says Oliver Sung, head of North American Equities at CBOE.

That’s a brand-new revenue source.

And the company is particularly shareholder-focused:

🔵Dividends: Back in August, CBOE boosted its quarterly dividend 15% — from 55 cents a share to the current 63 cents. This is the 14^th straight year CBOE has boosted its dividend — and brings the yearly payout to $2.52, a 1.2% yield at current prices.

The company has boosted its dividend at a compound annual growth rate (CAGR) of 12.2% since 2017.

🔵Buybacks: That shareholder “friendliness” — in which the company returned 65% of its adjusted earnings to shareholders — isn’t confined to dividend increases.

It’s also doing buybacks.

In tandem with that dividend boost, CBOE said it will repurchase another $500 million worth of its shares. Since launching its buyback program in 2011 (through to June 30 of last year), the firm has repurchased $1.6 billion of its shares — which means its program is accelerating.

🔵Return on Equity (ROE): That good-old profitability metric — which tells us how efficiently a company uses shareholder money — was 22.5% over the trailing 12 months. That’s an increase of 50 “basis points” (a half a percent) year over year. And it trounces the industry average of 13.2%.

🔵Cash: At the 2024 midpoint, CBOE had cash and equivalents of $614.6 million — a jump of 13% from year-end 2023.

I love this: All that cash gives CBOE the “raw material” for expansion investments, technology upgrades, buybacks, dividend boosts and more. It also gives the company a nice “margin of safety” to navigate tough stretches.

But the near-term outlook is bullish because of the new administration in the White House and the escalating uncertainty that we see.

Uncertainty leads to volatility. And volatility in this environment will only accelerate options trading.

There you have it: As options speculation explodes, this is one company that wins even when traders lose.

It’s “The House.”

We want to own it.

And we just showed you how to do it.

See you next time;

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