OMAHA, Neb.--(BUSINESS WIRE)--Iron condor. Butterfly. Straddle. Put. Call. Despite a more than 400 percent increase in the average daily volume of options traded in the past ten years,¹ these terms have little meaning to many American investors who remain unaware of the potential benefits and risks associated with adding options to a diversified portfolio. According to a new survey from TD Ameritrade Holding Corporation (NASDAQ: AMTD), more than three-quarters of self-described “buy and hold” investors have never bought or sold options.
“This survey tells us that while the tools are available, more education is necessary to help dispel some of the ‘myths’ that continue to exist with respect to options.”
The reasons are not surprising. One in three respondents (34 percent) claim that options are “too risky,” another quarter say they “don’t need them,” and yet another 23 percent admit they “don’t know how they work.” Furthermore, “buy and hold investors” are much less likely to say that options are “very” important to a diversified portfolio (12 percent) than “active investors” who claimed the same (38 percent).
“Despite an increase in the tools, educational offerings and research available to help individual investors of all experience levels better understand the risks and benefits of trading options, many still view them as too complex and risky,” said Joe Kinahan, chief derivatives strategist for TD Ameritrade. “This survey tells us that while the tools are available, more education is necessary to help dispel some of the ‘myths’ that continue to exist with respect to options.”
Myth #1 – Options are too risky for the average investor
It’s true that options are not suitable for all investors as they are subject to unique and sometimes significant risks, and there are important differences in the risks involved in options trading compared to stock trading or investing. However, many investors do utilize options to help manage the overall risk in their portfolios.
For example, some investors use what is known as a “protective put” to help protect a particular long stock position from the potential decline in price in an uncertain market environment for a set amount of time. In this case, an investor might purchase one put options contract for every 100 shares of a stock that he or she owns. The put gives the investor the right to sell the stock at a pre determined price (the strike price), for as long as the option contract is in force. Additionally, if the price of the stock declines below the strike price of the put, the price of the option will increase, possibly helping to offset losses in the stock.
With the protective put strategy, while the long put can provide some temporary protection from a decline in the price of the corresponding stock, if the price of the stock stays where it is or rises, the investor risks losing the entire amount of money invested in the option.
Myth #2 – Options are only for active or sophisticated investors
When asked, “How much do you know about options,” 42 percent of buy and hold investors surveyed said “just a little,” compared to the 33 percent of active traders who said “a fair amount” or the additional 20 percent who said “a great deal.”
The truth is that options can be used to help pursue both short- and long-term investment goals. Buy and hold investors can utilize options to pursue a goal of income generation or capital preservation, or to help reduce exposure to market volatility. In addition, while the IRS does place some restrictions on investments in individual retirement accounts (IRAs), some conservative options strategies are generally allowed.
Myth #3 – Options are too complex for the average investor to understand
With the right education from a credible source, learning how to use options can be readily understandable. Traders and investors new to options learn the basics, and then consider adding more complexity and risk based on their own goals and risk tolerance. Many firms, like TD Ameritrade, offer access to free educational webinars, seminars and tutorials on topics for the novice to the sophisticated options investor.
Like any investment product, investors need to decide for themselves whether options are right for them. To learn more about the risks and benefits associated with trading options, visit www.optionseducation.org. Or to take advantage of TD Ameritrade’s educational offerings, including programs focused on trading options, please visit http://www.tdameritrade.com/trade/options.html.
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 privileges subject to TD Ameritrade review and approval. Please see our Web site or contact TD Ameritrade at 800-669-3900 for a copy of Characteristics and Risks of Standardized Options. Carefully read and understand this document before investing in options.
Supporting documentation for any claims, comparison, statistics or other technical data will be supplied upon request.
Past performance of a security or strategy does not guarantee future results or success.
These results are based on a telephone survey conducted for TD Ameritrade Holding Corporation by Market Probe from May 21, 2010 through June 19, 2010. 650 respondents participated in this survey. Respondents were polled from a random sample of affluent US households. To be eligible for this survey, respondents had to have an account at a brokerage or mutual fund company, at least $5,000 in marketable securities or cash and bought or sold securities at least once in the past 12 months. The margin of error in this survey is ±3.8%. This means that in 19 cases out of 20, survey results based on 650 respondents will differ by no more than 3.8 percentage points in either direction from what would have been obtained by seeking the opinions of all eligible investors. TD Ameritrade and Market Probe are separate, unaffiliated companies and are not responsible for each other's products and services.