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December 6, 2006

Options' Growth Spot: Certification would give advisers better knowledge, strategies

By Mark Longo

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  • Options' Growth Spot: Certification would give advisers better knowledge, strategies
  • Page 2

An influx of institutions and do-it-yourself retail investors is continuing to drive up volume in the options markets. That's a deserved payoff for the industry, given the years of hard work it has undertaken in both its marketing and educational efforts. It appears more investors finally understand the numerous benefits of using options.

But one notable exception represents a vast untapped opportunity in new business. If the options industry is to continue its impressive growth, then it must find a new customer base in stockbrokers, financial planners and financial advisers. These are the investment pros whose retail customers rely on them for trading and investment decisions. (Retail order flow, by the way, is also the most cherished type of flow for market makers.)


It stands to reason that the advisory community would at least be familiar with options. The NASD's Series 7, chartered financial analyst (CFA) and other professional examinations all contain information about them, and options are the ideal hedge for equities. It's an asset class that most brokers and advisers should use. Unfortunately, that just isn't the case. This group does not use options to any appreciable degree. A 2005 study by Harris Interactive found that only 23 percent of options investors received their options information from a broker or financial adviser. The advisory community just isn't interested.

Why can't options penetrate this lucrative market? The perceived added workload to using options is a prominent hurdle. A busy broker or adviser has a lot of clients to manage. Between meeting with existing clients, looking for new clients, planning investment strategies and keeping abreast of market fluctuations, an adviser simply doesn't have time to add options to clients' portfolios. The hassle of calculating the optimal covered calls and protective puts for every client, compounded with the frustration of rolling these positions every few months, outweighs the protection and income they offer.

Fortunately, this problem has been alleviated in recent years by the rising commoditization of the options marketplace. Strategies such as covered call writing, which used to require continued vigilance on the part of the adviser, can now be automated with all-in-one products such as the buy-write index (BXM). Unfortunately, these products remain scarce. Until they become more prominent, planners and advisers will still have to do extra work if they want to trade options for their clients.

No Education

While time is an issue for many planners and advisers, lack of education is a far greater impediment to them using options. To put it mildly, most financial planners and advisers don't understand options. As a result, they do not feel comfortable putting them into clients' portfolios.

How can this lack of education be overcome? The answer is simple: certification. The financial industry has been testing and certifying financial services professionals for decades. However, these programs haven't shed the necessary light on options. While the Series 7, CFA and other programs touch on options to varying degrees, the amount of options content is small. For example, of the 10 major topics outlined in the CFA curriculum, only one covers derivatives. To make matters worse, only one-fifth of the information on that topic is related to options.