Bank of Montreal BMO-T is unveiling new features for options traders on its online investing platform, joining other institutions that are catering to retail investor demand for the leveraged and risky form of trading.
Options allow investors to bet on whether a stock will go up or down in price by purchasing a contract that allows them to sell a product at an agreed price by a certain date. A small initial investment can produce much bigger gains than simply trading stocks, but it can also lose an enormous amount of money.
BMO is decreasing the cost of trading options and regular stocks for traders on its InvestorLine platform who make more than 150 trades per quarter to $3.95 plus $1.25 for each options contract, down from $9.95 per trade plus $1.25 for each options contract. It’s also introducing functionality for multileg options trades – a more complex form of options trading that allows the purchase of multiple contracts for different dates in a single order. The platform will also feature educational videos and prompts so users can get in-depth knowledge about options trading before diving into risky trades.
The retail investing landscape has changed dramatically in recent years, as online trading platforms such as Questrade and Wealthsimple have spurred greater competition to make self-directed trading for stocks, cryptocurrencies and other products easier for casual investors.
Transactions that not too long ago would have required you to speak to a human are now possible at the click of a button. As a result, retail investors are increasingly looking for more technical features like options trading online. BMO InvestorLine president Silvio Stroescu said options trades can at times already account for 10 per cent of its overall trading volume for U.S. products on the platform. (He says U.S. trades often make up around 40 per cent of overall activity.)
“More people are investing in a way with a combination of with an adviser and on their own,” said Mr. Stroescu.
“So we’ve made a focus on how do we build digital investing tools and capabilities that match with what we’re seeing with those macro trends.”
There are many existing platforms for options trading, including Wealthsimple, Interactive Brokers, Questrade, TD Direct Investing and Webull, a Chinese trading platform.
Bilaal Dhalech, a personal finance content creator who has been trading options for seven years, says his preferred option for beginners is Wealthsimple because of its low fees and very simple platform. However, he said intermediate to advanced users may find sites like Wealthsimple limiting and often prefer platforms like Interactive Brokers or TD.
He added that a move by a Big Six bank to add an educational component and lower fees as BMO has done could be make it desirable for newer traders. Fees are of a particular interest because they’re often much higher for options than when trading stocks, while the educational component is important because of the potential for large losses.
Benjamin Felix, a portfolio manager and head of research at PWL Capital in Ottawa, said options can be a great hedging tool to balance a portfolio, but research shows that this is not the way retail investors tend to use them. (Both Mr. Felix and Mr. Dhalech were speaking generally about the investing strategy, without specific knowledge of BMO’s new features.)
Instead, Mr. Felix says retail investors often use options to gamble and chase big returns on risky trades. As a result, he says people tend to lose money, especially with complicated multileg contracts.
“When multilag trading becomes available … people often trade in strategies that have really high volatility, really high embedded leverage and lottery-like payoffs,” said Mr. Felix, adding that a Dutch study in the Journal of Banking and Finance of 68,000 accounts and more than eight million trades found that most investors take significant losses on their options trades, much more than when trading equities.
He said he would generally advise casual investors to steer clear of options.
“Building wealth is not something that happens with one big winning trade, which is what it seems like people are trying to get with their complex options strategies,” he said.
“It’s really a long and slow process that requires consistent saving and investing in pretty boring stuff like index funds. Chasing big wins, whether that’s with individual stock picks or complex options is probably more likely to destroy wealth than create it.”
For people dead-set on getting involved, Mr. Felix said it’s imperative to do lots of research before making trades. While it’s possible to “dip your toes” into trading stocks, options are risky and complicated enough that fund managers sometimes struggle to understand some contracts.