Placing another layer of value on top of assets that have inherent value has ancient roots, going all the way back to 7th century BCE. This speaks to the inherent demand for speculation about value. Will the weather make the next crop flourish or will it make it sour?

From those days of yore, placing wagers on underlying assets has come a long way. According to the Bank of International Settlements (BIS), the notional value, as hypothetical size of derivatives contracts, grew to $632 trillion by mid-2022 in over-the-counter (OTC) trading.

These wagers are called options contracts, by which traders pay a small fee to gain the right, without obligation, to buy or sell an asset at a set strike price later on. Effectively, options traders are empowered to get the first dibs on an underlying asset they think will become more valuable. On the selling side of the equation, they are renting that wager to others for a fee.

This dynamic makes it immediately clear that information in option trading is king. Traders need up-to-date information on volatility and market trends together with option contract details to gauge the risk-to-reward ratio. Accordingly, the traditional way of doing things has been rife with challenges:

• Lack of real-time data and analytics.
• Lack of market depth knowledge to gauge liquidity for a specific options contract.
• Slow order execution that leads to missed market opportunities and unfavorable fees.
• Lack of flexibility when implementing more complex, conditional options strategies.
• Lack of access to options contracts and high commissions to boot.

Digital platforms marked the beginning of a new era in the derivatives market to address these challenges. As financial technology (FinTech) started the revolution in robo-advisors, peer-to-peer (P2P) lending, payments, blockchain, market regulation and insurtech, options trading has never been this streamlined and accessible.

The Evolution of Options Trading Platforms

With the rise of mobile banking apps, it didn’t take too long to completely transform options trading. In the bygone era of the 19th and 20th century, traders had to rely on phone calls and shouting in the open outcry pits, such as the Chicago Board Options Exchange (CBOE).

In this maelstrom of noise, traders and their brokers had to collect key info, manage contract positions and confirm trades. Only relatively recently, since the 1980s, have electronic trading platforms gradually replaced open outcry pits. 

“Trading Places” is the iconic movie of the derivatives market era in the early 1980s, revolving around orange juice futures contracts as the key plot point.

Leaving open outcry pits behind, FinTech integrated digital technology as the final transformative milestone. Within a unified interface, derivatives market opened up as a streamlined experience:

• Demo accounts to ease in novices.
• Intuitive interfaces with educational resources.
• Real-time data monitoring and access to markets.
• Lowering the barrier to entry further by implementing fractional shares of options.

By 2023, mobile banking became the primary method of financial access in the US. Moreover, by August 2023, a Forbes Advisor survey found that 53% of people use digital wallets more than traditional payment methods. Given that one could switch from one app to the other, the derivatives market gained the broadest audience in history. 

Financial institutions took note. InteractiveBrokers, Webull, E*Trade, Robinhood and others are now in an arms race. Which options trading app has the best user-friendly design, analytics and fees? 

Commission fees were the first casualty of this war, with InteractiveBrokers eliminating platform fees, ticket charges, and lowering commissions to third party fees such as clearing, regulatory and surcharge fees.

In the mental load department, options trading became a breeze with options spread templates and one-tap strategies to compare and combine. Just a few decades ago, such convenience was unthinkable.

Example of options spread templates on IBKR Mobile.

Most importantly of all, digitization now makes it possible to shuffle trading strategies to new complexity heights, while still being accessible to a broad range of users.

Automation and Lego Options Combinatorics

For people who had Legos in their childhood, it is easy to understand how game-changing the new innovative tools have become. Just like Legos have individual bricks, bound by shapes and functions, so do option spreads have individual “legs”. 

These legs have their own type (call or a put), strike price and expiration date for the options contract. By combining legs, traders can create unique options spreads, enacting their unique risk and reward profiles.

And just like Legos allow kids to build countless combinations, changing individual legs allow traders to tailor their strategies to fit their needs with a swipe of a finger. Another enhancing innovation that was previously unthinkable is the automation aspect. 

Options trading apps provide portfolio scanning for the most optimal, low-cost options strategies. Likewise, automation features like the Options Wizard replaced individual brokers shouting in the open outcry pits. By prompting users to answer questions on their knowledge and market expectations, automated trading bots churn out actionable plays. 

From this input, algorithms present users with different strategies based on their preference for risk, profit probability and max gains. Reliant on software market analytics that was previously reserved for professionals, users of all stripes can then identify low-cost strategies, when to place protective puts, delta hedges and gauge implied volatility.

The Future of Options Trading with Blockchain and AI

While FinTech moved the needle of accessibility and streamlining user experience, blockchain technology is another step forward. Self-executing smart contracts, secured by the nodes of the blockchain network, can tokenize any real-world asset. 

In their tokenized form, these synthetic assets then mirror their performance. Because smart contracts remove the need of third parties, trading in options and futures becomes even more cost-effective.

In addition to reduced transaction friction, contract settlements then rely on the speed of the blockchain network itself. For instance, Solana and Avalanche networks have near-instant settlement times. Major financial institutions, such as Citigroup and Wellington Management, had partnered with Avalanche to explore the tokenization of private equity funds on its Spruce Subnet. 

The largest bank, J.P. Morgan, had also partnered with Avalanche to interface with its proprietary Onyx system for portfolio management. As these blockchain networks interlink, the financial markets are heading into a new era of 24/7 securities transfer, multi-asset tokenization, electronic signature, provenance asset registry and asset lifecycle automation.

The emergence of AI, on top of interlinked blockchain networks, poses the final step in the derivatives market access. Behind the algorithmic hood, as AI analyzes market patterns to identify investment opportunities on the fly, users would just need to pick how aggressive it is in its automation of trading. 

At the end of the day, no human brain can hold and model that much market data as AI algorithms can. AI’s predictive analytics, such as OptionsOracle, will then drive market trends, as AI agents interact with each other’s models of market reality.

This applies to AI’s natural language processing (NLP) algorithms as well. As AI gets more involved in churning news and social media content, various AI agents will analyze this content in conjunction with predictive analytics to optimize options trading strategies.

Conclusion 

In the age of electronic systems and phone lines, it was easy to set the rules of market engagement. FinTech changed this landscape drastically. Reliance on mobile banking apps alone introduces risk of social media contagion and bank runs.

Effectively, this translates to a substantial lag between technological and regulatory initiatives. The US has yet to deliver a comprehensive legal framework for blockchain-based assets, including stablecoins. 

Given the complexity involved in investor protections, key industry leaders are likely to set the next rules of market engagement. And that landscape will certainly be a mix of open and proprietary blockchains that host tokenized assets. 

On top of this tokenized hill stands AI. Bundling risk management, predictive analytics and automated trading under its hood, we will see hidden complexity that interfaces with user-friendly simplicity. It only remains to be seen which platforms will prove themselves the most robust.