How Practitioners Can Get Started With Options

When I talk to financial advisors about how they might incorporate option strategies in to their client portfolios, I encounter a good bit of skepticism. Often, I hear one of two themes about why they aren't already using options: First, they're not sure whether these strategies make sense for their clients, or they feel options may be too risky. The second is that, even if they might like to get started with options, they don't know if they want to put in the time to learn how options can benefit their clients.

You may have learned just enough about options to get licensed, but then what? For many of you, it may have been analogous to the frustration of learning how to parallel park: Once you passed your driving test, you didn't want to think about it again. After you passed your Series 7, you decided, like many advisors do, that options required time and additional due diligence and are simply better left to fund managers or institutions.

I understand the hesitation - I was an advisor for many years, and I used to think the same way. However, during my time at OIC, I've become more  convinced of the utility of options as a strategic investment tool.

Let's be clear: Options, like any other investment, have certain risks. But in the right situations, options can be a powerful way to both enhance your clients' strategic goals and also differentiate you as a financial professional who isn't content to serve up only the standard, ordinary cup of java. Sure, you can follow the simpler path, or you can educate yourself to be a serious practitioner with the ability to prepare specialized blends to meet your clients' needs. That's why I want to focus on how you can start the conversation about options with your clients.

The good news is that options can be used for many purposes, including downside protection, income opportunities or tactical rebalancing. Risk management in particular may be a great place for you to begin speaking with clients - it's intuitive, and many investors want to figure out how they can mitigate potential losses. Suppose your client is long a stock or an ETF that has risen in value, and they want to protect their gains. One way to do so would be by purchasing a put, which is often referenced as similar to insurance. Depending on the option, your client could have a number of expiration dates and strike prices to choose from (which, incidentally, is one of the strengths of options). Options provide choices, and you can analyze a variety to determine which one best fits the needs of a given portfolio.

Another idea that will allow you to talk to your clients about income generation is the covered call, which involves selling a call against a long stock or ETF the client already owns. In this case, your client could be collecting income, while also defining an exit price (to sell the underlying at a predetermined price) and simultaneously partly offsetting a decline, should that occur. Covered calls can allow you to lower the cost basis of a long position, since the income received from the sale effectively lowers the acquisition price.

What if something else is brewing in your client's mind? Fine. You can consider another options-based strategy to start the  conversation. Maybe you have a client who wants to prepare for a potential increase in volatility or who is looking for a way to acquire stock at a better entry price. Options can be like a customized roast, offering an array of entry points and opportunities, each with a unique flavor.

Now, while versatility is a major aspect of options' attractiveness, it can also be a reason options may be overwhelming when you're getting started. As a result, I believe it's important to focus on only one of the strategic advantages initially, rather than trying to list off everything that options can do.  Think about when you're learning to ski - you probably wouldn't start on the steepest hill. Or when you go back to the gym for the first time in a few years, you likely aren't picking up the heaviest weights. Same idea with options and drinking hot coffee. Take small sips, one at a time.

Also, don't let the options vernacular dissuade you. Yes, you need to know some of the main terms about options, but you don't have to be a trader who's all about being delta neutral. Focus on the client's ultimate goals. Additionally, if you're thinking about making options part of what you do, it may help set you apart when you're prospecting for new clients. There's absolutely nothing wrong with talking about index funds, but there can be additional merit to having a broader approach, as well. A 2015 Harris Poll survey details fairly clearly that investors who use options are an advantageous group to pursue.

Of course, talking about options investing with clients is one thing, but doing it is very different. Fortunately, you can go from theory to paper trading by using free trading simulators. My favorite recommendation to registered investment advisors and financial advisors is the OIC's Options Strategy Builders. Also, our Options Education Program is designed to take you step-by-step through the options universe. Even small portfolios may benefit when incorporating options into the investment mix.

The main takeaway with all of this: Options may not be right for every client or every situation, but if you do a little research, you might find that the products can fit within your practice. I know the concept of options can give some of you pause, so earlier this year I wrote on the topic of how to get more comfortable with them, in Overcoming the Misconceptions About Options. That blog may help you get your feet under you when it comes to options. When you combine your new knowledge with what you already know about your clients' goals and time frames, you may have a great blend to start a talk around options.

Once you're ready to learn even more, OIC is here to help, contact our Investor Services professionals with your questions or attend one of our free events. You could also check out our Video Library, where you can find titles such as Starter Strategies and Concepts. In other words, we've got a lot of items on our options menu. I know one of them might be just right for you.

Options involve risks and are not suitable for everyone. Individuals should not enter into options transactions until they have read and understood the risk disclosure document, Characteristics and Risks of Standardized Options, available by visiting or by contacting your broker, any exchange on which options are traded, or The Options Clearing Corporation at 125 S. Franklin St., #1200, Chicago, IL 60606.  
In order to simplify the calculations used in the examples in these materials, commissions, fees, margin, interest and taxes have not been included. These costs will impact the outcome of any stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences.
Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes and should not be construed as an endorsement, recommendation, or solicitation to buy or sell securities.  Past performance is not a guarantee of future results.
Copyright © 2020. The Options Clearing Corporation. All rights reserved.