Tuesday, July 15, 2008

Options trading gaining in popularity among small investors

Despite the risks, options trading is become more popular among non-professional investors (free WSJ Digg link). The numbers tell the story:

This year through June, options trading volume jumped 38% from the same period last year, to 1.7 billion contracts, according to Options Clearing Corp., which clears options transactions. While many of those trades were made by Wall Street pros, individual investors have demonstrated a growing appetite for options, which are, in essence, contracts to buy or sell a stock or other asset at a set price within a certain time period.


At optionsXpress Holdings Inc. and its younger rival TradeKing -- two brokerage firms catering to small investors -- options-trading volume climbed 21% and 150%, respectively, in the first five months of this year from the same period a year ago. A recent survey by brokerage firm OptionsHouse Inc. found that 60% of online options investors have traded the contracts for five years or less.
Are retail investors going to get burned by options? Only time will tell. The article has a couple of anecdotes about individuals that lost a small fortune trading options.

To satisfy this increase in demand, and to attract even more small investors in options, simplified options products are being rolled out:
The American Stock Exchange in May, meanwhile, launched a simpler type of option -- called a "fixed-return option" -- designed for novices. Buyers of these simplified products face only two possible outcomes at expiration: A return of $100 per contract, or nothing. Bullish investors can purchase a "finish high" option, betting that the underlying stock will be above a certain level on the expiration date, while bears can buy a "finish low" option, betting the stock will be below a certain level on that day.
Personally, I'll stick with my covered call writing. I still remember the warning a friend of mine gave me about options years ago. It only takes a few contracts expiring out of the money before you're wondering where all your cash went.

1 comment:

  1. Sticking with covered call writing is just fine, but wouldn't you appreciate a similar strategy with a built in safety net?

    You have a couple of alternatives. First, there's the collar. Sure you give up a portion of your profit potential, but IMHO, the insurance is worth it.

    Second there's the put credit spread - which is synthetically equivalent to the collar.

    Just ideas for you to consider - unless you are very bullish and prefer to stay with writing covered calls.