Options: No Longer a Speculative Play

At the 76th annual STANY conference, the options panel’s message for the mainly equity based audience was that options aren’t just about speculative positions anymore. With U.S. Equity Options volumes growing 19% year over year[1], others in the financial industry may be changing their prior perceptions about options as well.

Over recent years, a strong educational drive from the Options Industry Council has resulted in a sophisticated retail base using options as insurance to protect positions and as an income generator on stagnant positions. Alan Grigoletto, the panel’s moderator, pointed out people are gradually becoming more and more successful at trading stocks with their corresponding options and thus creating new opportunities in the market place. This is a far cry from the days when an investor could only buy a call.

With this shift in the industry, the panel participants urged equity traders to familiarize themselves with the options marketplace. They argued a failure to understand options, in this age of multi asset and multi-regional financial strategies, could leave a trader in the dark. The interaction between the equities business and the options business is of course symbiotic. Jon Werts, a panel participant, claimed equity traders should hope for a strong options business pointing to the fact that options market makers constantly hedge their positions throughout the day in the equities markets.

Eugene Choe also indicated an understanding of expiration in the options markets could help equities traders to better understand price action in their own markets and therefore, enable them to strategize and respond more effectively at expiration.

The panel noted a currently untapped market participant in options is pension funds. Many funds continue to state in their rules that they prohibit investments in “derivatives,” a likely remnant from the days when options were primarily perceived as a speculative position. However, as education and outreach to fund managers continues, and as the benefits of insuring positions or utilizing covered calls are made clear, the panel expected entry of pension funds into the options market was on the horizon.

Perhaps one of the most interesting comments of the panel came from Kevin Murphy. He noted that because of the high costs of operating in the options market, large consolidators are better positioned to absorb upcoming regulatory changes due to economies of scale. With other segments of the financial industry unlikely to fare as well, Kevin believes we will continue to see options volume growth.

For now, watch this space…….

STANY Options panel “Trading Options in the US, not always from US soil” participants: Alan Grigoletto –OIC, Eugene Choe – Credit Suisse, Kevin Murphy – Citigroup, Keller Reid – Penson Financial Services, Ismael Santiago – Livevol, Inc, Jon Werts – Bank of America Merrill Lynch. For more information click here.



[1] Data from OIC (2010 vs. 2011)