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January 17, 2007
Options Find a Place in Retirement Accounts
The traditional view of options can best be summed up in one word - risky. That has always frustrated me, mainly because it is such a persistent myth. Options can be risky, particularly when they are used to place a bet on the future direction of price. If that's what you want to do, why don't you just go to Las Vegas?
Increasingly though, options are being used in the way I believe they ought to be used, which is to manage risk and create portfolio income. Even more specifically, they are being used to generate portfolio income for retirement portfolios.
Charles Schwab did a survey of some of its options customers and were pleasantly surprised to find most of them were using options in this very conservative way. The Wall Street Journal reports:
The survey showed that 61% of them consider themselves to be risk takers, but only 40% think there are more gains to be made with options than with stocks and bonds, and only 31% agree that they like trying to outsmart the market with their option trades.
Instead, a far higher number -- 69% -- consider option trading "a great way to generate income" and perhaps most interestingly 56% say option trading is part of their retirement investment strategy.
That last figure is particularly interesting to Randy Frederick, director of derivatives at Charles Schwab. It wasn't long ago that option trading wasn't considered appropriate for retirement, he notes.
I have also noticed a trend toward much more widespread understanding and acceptance of options. In my talks I always ask how many people in the room are familiar with options. Back in 2001, I'd say only about 10% - 20% raised their hands. Today it is well over half. And they don't express nearly the amount of fear and trepidation about using them they once did. Most people now realize they are pretty mainstream and want to learn more.
"I can't teach you how to get rich quickly trading options," he hammers home to customers, Mr. Frederick said, but, "I can teach you how to protect what you have and get rich slowly."
That is really the key. Professionals know options are just a tool for achieving certain objectives. Getting rich quick isn't one of them. Highly leveraged, speculative bets using options almost never work out. But using options to manage risk and create portfolio income almost always does.
I'd like to thank Professor Frank Anderson, from UT-Dallas, for sending me the heads up on this article and I'd like you to weigh in with your thoughts. As always, you can leave your comments below.
SOURCE:
1. Mohammed Hadi, "Options Find Favor With Investors Seeking Strategies for Retirement." Wall Street Journal 3 Jan 2007; C2. (registration required)
http://online.wsj.com/article/SB116778575233765465-search.html
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
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Options trading is only risky if I do not know how to identify and manage the risks involved. If there is a strategy to manage the risks, then it maybe viable to use options as a vehicle to achieve my financial goals. This is only possible if I focus m... [Read More]
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Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.
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