During our lunch, we discussed the market and how pathetic the volume has been for stocks lately. Our conversation turned to options and whether there had been the same kind of drop off in volume. This simple conversation sent me down a path that led me to some pretty staggering findings.

After doing searches for volume data from the New York Stock Exchange (NYSE) and the Chicago Board Options Exchange (CBOE), I discovered that there is a major shift happening in the way investors view and use options.

Let’s start by looking at the volume on the NYSE. From 2005 through 2008, the average annual volume on the NYSE grew by over 10% per year. After the bear market from 2008-2009, the annual volume declined each year, with 2010 volume declining 19% from the 2009 volume. For the 2011 numbers, I used the average monthly volume for the first 11 months to arrive at a total for December in order to get a full year of data. As we enter the final week of trading, we are looking at another double-digit percentage volume loss for 2011.

What this suggests is that the average investor hasn’t come back into stocks at the level they were before the bear market. After dealing with two bear markets in less than 10 years, perhaps the average investor’s confidence is shaken and this is keeping them out of the market.

The next step was to look at the annual volume on the CBOE. Options trading grew by huge percentages from 2005-2008, with an average annual growth rate of 35% over the previous year. However, rather than declining sharply in the last three years, options volume declined by a much smaller percentage than stocks.

I have been trying to tell people for a number of years that options present a way for investors to participate in the market’s movements with far less money tied up in the market. Perhaps investors are starting to realize this and so options volume has been relatively stable over the last three years.

The final step in my analysis was to take the options volume and multiply it by 100 because each option represents 100 shares of the underlying stock. After taking this step, I looked at the options trades as a percentage of the stock trades. For instance, in 2004 there were 369.6 billion shares of stock traded on the NYSE, while 361 million options contracts were traded on the CBOE. In this case, the option volume multiplied by 100 came out to 36 billion shares of stock represented. The math from there is pretty easy as 36 billion is just under 10% of 369 billion. In other words, the amount of stock represented by options traded on the CBOE was approximately 10% of the NYSE’s stock volume.

So options trading grew faster than stock trading from 2005-2008 and then didn’t drop off as much in the last three years.

From the table above we see that the amount of stock represented by the options traded on the CBOE has increased sharply as a percentage of the stock traded on the NYSE. The number of shares controlled by options was just under 10% in 2004; in 2011, it’s estimated to be just under 30%.

Whether it is Main Street or Wall Street, investors have discovered that options present opportunities and strategies not available with stocks alone. With options, you can lower your total dollar exposure, but still participate in the market’s movements. You can use covered call strategies to add income to your portfolio or you can buy protective puts as insurance for your portfolio. But the view that options are only for risk takers is definitely changing and services like the Cabot Options Trader are becoming more sought out by investors. It has been 21 years since I made my first options trade and now more and more investors are realizing how options can play a part in their portfolio. It’s about time.

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Just this week, the market appeared to give a clear signal which direction it was headed (up), when more bad news out of Europe crushed the indexes on Tuesday. The market’s action has left many investors confused and wondering what to do next.

My advice? Study up!

This is the perfect time to read an investing book, print out your top investing rules and study them or review past trades to see what you could have done better. Instead of sitting on your hands, waiting for the market to settle down, you could be improving your investing knowledge to prepare you to handle whatever the market throws your way.

Think of it as training, like sports teams do in the off-season or runners do for races.

Right now, I’m training for a half-marathon (which, to me, isn’t half of anything!) that I’ll run next weekend. I’ve put in many hours pounding the pavement in sun and heat as well as rain and cold. Training in all weather conditions and all circumstances helps prepare me for what I’ll encounter on race day, which could be pretty much anything, as evidenced by our freak early season snowstorm in New England last weekend!

The race may only last a little while, but it’s a culmination of all of the time and effort I’ve put in during the months leading up to it.

This is also true of investing. You might not make that many trades every month or even every year, but all of the work you do in the “off-season” will pay off handsomely. If you’ve done your homework!

So pick up your favorite investing book or visit our website (www.cabot.net) to read up on how to become a better investor. We have full archives of all previously published Cabot Wealth Advisory issues as well as a thorough education section that can help anyone–from the novice to the professional–succeed in the market. If you do your homework, you’ll be rewarded when it’s time to invest aggressively again. Your portfolio will thank you.

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The weather has gotten colder here in Massachusetts lately, so I’ve invested in some new running clothes to stay warm during training. I’ve been reading about Under Armour’s (UA) Charged Cotton for months in several of our newsletters and decided to try it for myself. I’ve always had a fondness for the company’s original compression sportswear, so I had high hopes for this newer product.

And it has lived up to my expectations! It dries significantly faster than regular cotton and is far softer as well, even with repeated washings. This innovative product has made Under Armour an even more dominating player in the world of fitness attire. Here’s what Cabot Top Ten Trader Editor Mike Cintolo had to say about the stock recently in that newsletter:

“Under Armour is acting like one of the leaders of the new market advance, as investors have an appetite for retail stocks in general, especially those with a unique brand and powerful sales and earnings growth. On that front, Under Armour reported another stellar quarter last week; revenues rose a huge 42%, matching the fastest growth rate in years; apparel revenue was up 31% and, impressively, direct-to-consumer revenue (mostly online sales), which accounted for one-fifth of all sales, was up 73%. Earnings rose a good-not-great 29%, which was ahead of estimates, though it still leaves open the worries of profit margin deterioration as input costs surge. Those worries briefly knocked the stock lower after the report, but the stock’s huge upmove by week’s end tells us that investors are looking at the big picture–while the stock sports a premium valuation (51 times trailing earnings, 37 times next year’s estimate), the firm’s consistent, rapid growth, increasing market share and stream of new products point toward Under Armour getting much, much bigger in the years ahead. If management continues to make the right moves, this is the type of name that could be a core holding for many institutional investors.

“After plunging into August, UA enjoyed one of the sharpest rebounds during the market’s failed September rally, which was a clue that demand for shares was still strong. After consolidating for a few weeks in the 70 to 80 range, the stock soared to new highs last week on its heaviest weekly volume in years, clearing a 13-week structure. This early in a new advance, we wouldn’t expect a big pullback from a new leader, so if you don’t own any, we advise starting a small position on a dip of two or three points, with a 10% or so loss limit.”

With the market still chopping around, you could buy UA here and hope for the best, or you could get Mike’s latest recommendation on this and other leading stocks in Cabot Top Ten Trader. It’s THE place to read about the leaders of the next market advance before most investors are aware of their stories. Click here to try it today!