Investment Advisors Opt for Options

Terry Flanagan

Financial advisors are increasing their usage of options both as an investment choice for clients and as a way to hedge client positions.

“We’ve seen a notable increase in trading and inquiries surrounding options and options-based strategies by advisors,” said Dan Carver, options trader at Fidelity Capital Markets.

A 2011 survey by Bellomy Research on behalf of The Options Industry Council (OIC) provided a benchmark measure of options usage among advisors, and insights into how, when and why advisors used options and a comparison of advisors who use options with those who do not.

“The CBOE and OIC have expanded their educational resources over the last few years in response to that,” Carver said. “The OIC in 2012 offered its first conference geared toward this segment of institutional investors and together with ongoing educational support from the industry the conversion rate has the potential to grow further.”

One of the key findings of the survey was that options have gone mainstream. The survey found 48% of advisors reported using options at least once in a client account in 2010 and one-third planned to increase their usage going forward.

“Advisors will generally use options to derive income via covered call writing or for use in protecting a portion of their client’s portfolio,” said Carver. “While some are actively managing client-specific stock risk themselves, others are choosing to allocate to sub-advisors who run a base options strategy, ’40 Act fund, or an active ETF.”

Another finding was that usage by advisors is broad and deep. While covered call writing is the most popular options strategy, the majority of advisors are also using options to hedge client positions or to acquire stock for a client’s portfolio at a specified price and time in the future.

Additionally, advisors that use options had significantly more successful practices. According to the survey, 85% of advisors with books of business over $100 million use options, while only 38% of those with under $100 million use options. Inflows into options strategies were very positive in 2013 despite the steady market run-up.

“Most likely, it’s due to limited expertise in the product compared to equities,” Carver said. “Pension funds are a good example of limited option usage. This is due mainly to pension boards who may perceive options as risk enhancing rather than risk reducing. Pensions represent the largest untapped pool of potential options business.”

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