Letter to the Editor

 

To the Editor:

I was very disappointed to read “Growth in Options Trading Helps Brokers but Not Small Investors,” (Business Day, May 24) as it was very short on facts but long on opinion.

To make his case that options do not benefit individual investors, the reporter relies primarily on some former TD Ameritrade employees who have started their own business to fix the “problem” they discuss, an outdated Dutch study (Dutch?!) and stat from SigFig that raises more questions than it answers. In the one sentence reference to the SigFig “analysis” there are zero details, and it doesn’t even show any harm to investors who use options. It only says that some unknown set of investors who use options did less well, based on some unknown criteria, than some other unknown set of investors who don’t trade options.

Contrary to the article, individual investors have been at the core of the business for most of the 40 year history of exchange-listed options, with institutional investors claiming a larger share over the last dozen years. Individual investors seeking to trade options must obtain special approval from their brokerage firms before they are allowed to do so, something both the regulators and good business sense demand.

Used responsibly, options can help investors earn income from their portfolios, lower the risk in their stock portfolios, or speculate in the market. There are options strategies investors can use to achieve these goals in a variety of market conditions, whether their outlook is bullish or bearish. The strategies will work as designed, but it is all about the inputs. That is why The Options Industry Council (OIC) has worked for more than 20 years to ensure investors understand both the risks and the benefits of exchange-traded equity options.

The article, however, only focused on the speculative use of options. In introducing the Dutch study, the author claims “many studies” show options traders “underperform buy-and-hold investors” but the Dutch study explicitly states it ruled out hedging as a motivation for options trading. A study covering the period 1996-2011 by the University of Massachusetts (in the United States, with U.S. investors) found exactly the opposite, that investors employing a Buy-Write strategy outperformed buy-and-hold stock investors.

Education is the key, and OIC, the options exchanges and all the firms mentioned in the article are working very hard to ensure investors understand how best to use options. The author could use some of that education as well since his definition of options are something that allow “for a small initial investment that can lead to either big gains or big losses.” If options were purely the speculative device the author believes, then he would be right about the need for firms to be “luring” investors to use them.

However, since the financial crisis, investors—individual, institutional and even “ordinary” investors—have sought ways to manage risk more effectively. Options are a tool that can help investors manage their risks. This is the source of much of the growth in the options industry the last several years, and it has helped both brokers and small investors.

Sincerely,

Gina McFadden

President

The Options Industry Council

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