by Jeff Chiappetta
Independent RIAs are able to differentiate their businesses in many ways; one of those ways can be by using options strategies in client portfolios. Using options strategies may effectively display another layer of sophistication in managing client investments, possibly setting you apart from the competition.
Even the most basic option strategies can provide ways to hedge against potential losses in a stock or portfolio, reduce exposure in a particular sector or possibly generate income. Although options trading involves risks and is not suitable for all investors, RIAs who implement options-based strategies for clients can potentially help those clients navigate a smoother ride through turbulent markets.
Weighing the Benefits and Risks
The benefits of adding options trading to your professional skills include the ability to provide clients additional paths-and precision-in pursuing their investment goals. Options can offer greater control over investments by providing companion positions, such as covered calls or protective puts, for an asset that meets the client's diversification expectations. And advisors who trade options typically prefer a "solution approach" over a "product solution" when constructing client portfolios, according to a survey by the Options Industry Council and the Diamond Group.1
Of course, options aren't without risks. Advisors need to discuss with clients whether the potential risks and rewards of an options strategy is appropriate for them. Each option strategy comes with its own set of possible benefits and risks. Available on the Options Clearing Corporation's website is the Options Disclosure Document which covers the many risks involved with trading options.
Resources Abound
It may seem daunting to embrace options trading, given the knowledge and time required to do so. But a variety of resources and support are available to help advisors more easily expand their use of options or start trading them for the first time.
For example, TD Ameritrade Institutional's Options Market Center includes a Strategy Desk tailored to an individual advisor's level of options knowledge. The experts who staff the Strategy Desk are available to help advisors:
- Understand the risk-defined options strategies that can help achieve their clients' goals and objectives;
- Better communicate with their clients about how options can help mitigate risk and potentially minimize the effects of volatility within a portfolio;
- Improve client service and cater to their more sophisticated clients.
Other options education resources include the Chicago Board Options Exchange (www.CBOE.com), which provides an online advisor knowledge center and education opportunities including seminars, online courses and webcasts. And the Options Industry Council, created in 1992 to educate investors and advisors about the benefits and risks of exchange-traded equity options, offers a dedicated advisor portal at advisor.optionseducation.org with access to online classes, webcasts and white papers.
A 2011 benchmark study by the Options Industry Council2 found that options usage among advisors is on the rise, and advisors who use options tend to have more assets under management than those who don't. The study found that nearly half of the 600 financial advisors surveyed used options in the last year for their clients, and more than a third of advisors who use options have increased their use of them over the past few years.
Taking the time to explore options resources so that you can implement options-based strategies with your clients may be well worth the effort.
Jeff Chiappetta is managing director of trading and fixed income for TD Ameritrade Institutional.
Endnotes
1 OIC Financial Advisor Engagement Study, December 2009, The Options Industry Council (www.optionseducation.org)
2 Financial Advisors' Use of Options: A Benchmark Study, May 2011, The Options Industry Council (www.optionseducation.org/press/files/fa-benchmark.pdf)
Tools to Use
Whether you need help implementing options strategies into your practice or want to expand the options strategies you already provide clients, TD Ameritrade Institutional's Options Market Center can help. The center includes:
- Education: Live workshops and online resources addressing the fundamentals as well as the intricacies of options strategies.
- Expertise: Consult with a specialist on the Strategy Desk. Our team of seasoned industry veterans provides options-related expertise and guidance to help you to make the most appropriate decisions for your clients' portfolios.
- Next-Generation Technology: An advanced platform for equities and ETFs, thinkpipes provides streaming access to financial markets and advanced trading capabilities including, extensive charting, built-in portfolio analytics, real-time risk management and complex options functionality and pre- and post-trade allocation of block trades-all while integrating with Veo®.
Find out more at www.tdainstitutional.com/options.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options. Examples presented in workshop sessions are for educational and illustrative purposes only and are not a recommendation or solicitation to purchase or sell any specific security or product.
TD Ameritrade Institutional, Division of TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2011 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.
