In our recent post,?OIC Advisor White Paper, “Tales from the Front” Part I, we shared the first part of the new findings with the section, “?WHY THEY USE OPTIONS AND THE?STRATEGIES THEY FAVOR.
For this new post, we’ll include the sections, WHAT CAUSED THEM TO ADD OPTIONS?(THE AHA! MOMENT) and?HOW DID THEY GET STARTED
WHAT CAUSED THEM TO ADD OPTIONS?(THE AHA! MOMENT)
Over half of the advisors OIC spoke with could pinpoint the moment they decided to start using options. For some it was the market crash in 2007-2009.
- ?My aha! moment? That would be when the market crashed. I would literally wake up my wife with my kicking because I was so worried about my clients. I had been using options based strategies for my biggest clients and after watching what was happening– with hedge funds in particular– I decided that options were right for all of my clients, not just the bigger ones.?
- ?When I got into this business was I using options or even considering them? No, absolutely not. My aha! moment was probably in?08, early 2009, when there was so much volatility in the market and we were looking for a strategy to take advantage of that volatility and boost client return because that was a struggle back then.?
Other advisors said there just came a point when it all made sense.
- ?I guess my aha! moment was realizing there wasn?t anybody out there doing it. One day I wondered, ?Why would anybody buy mutual funds when you could create a portfolio, and then use options to hedge the risk of the downside and help finance the cost of the puts by selling calls???
- ?As far as an aha! moment? I didn?t have one, I don?t get emotional around investments because they don?t always love me back. But I guess a mini aha! moment was realizing options had the potential to generate above ?average returns for a portion of some of my clients? monies.?
For some?panelists, using options was a realization that came to them over time.
- ?You know, it was more of a kind of an evolution, where we kept looking for ways to gain an edge in the market and we came to the conclusion that one relatively easy way was via options around core positions.?
- ?It was just one more thing to do to add value. In a managed account we can do it without paying commissions, which is even better.?
HOW DID THEY GET STARTED
There doesn?t appear to be one right way for an advisor to get started with options, though a majority of the panelists had used options in their own accounts before using them with clients. Often, it was a case of preparation meeting opportunity. They had decided to use options, had taken the time and effort to?learn what they needed to know, and then either market dictates or client needs led to the implementation.
- ?In the downturn in ?07, I actually did a lot of put selling, I said ?Look, you want to own this blue-chip stock but you?re afraid to buy it. If you were paid a certain amount to buy it and that lowered your cost basis if you owned it, would that be agreeable to you?? It was a passive way to get into the equity market.?
- ?I had a client who wanted additional income over dividend yields and I said ?Well, are you willing to give up a little of the upside in exchange for extra income?? And in his case the answer was yes, so that was the first road down to covered calls.?
Typically, the advisors used options with their more knowledgeable clients first, who may already have been familiar with the concept of options, or could more easily understand them. In a couple of cases the clients themselves asked about options.
- ?I started using options personally around 1995, before I became a financial advisor which was in January 1998. I used covered call writing that first year of being in the business with a handful of clients who at that time were individual-equity oriented. And, in the case of a couple of my clients, they were knowledgeable and had already been doing covered call writing.?
- ?We first started using them in our clients? portfolios that were more market-savvy.?
- We had clients that said ?Hey, take a look at my portfolio. Are there any stocks that it makes sense to write some calls on?? So we took the list to our options desk and said, hey, here?s what we?re trying to do; we?re looking to generate some income, the client?s modestly bullish or modestly bearish on the position whatever it may be, and we came up with a strategy. We went back to the client and boom, we?re done.?