Commentary

Joanna Fields
Traders Magazine Online News

Navigating Cybersecurity on a Stretch of "Regulatory Rapids"

In this shared commentary, Aplomb Strategies writes that when considering a firm’s governance structure, a holistic approach makes the most sense.

Traders Poll

Would you feel better if the Chicago Stock Exchange were purchased by U.S. firm or consortium rather than a foreign one?

Yes

73%

No

4%

Doesn't matter to me

23%

Free Site Registration

March 2, 2012

Industry Eyes Institutions

By Peter Chapman

Options industry officials are looking to large investors for growth. According to one veteran options executive, growth in the use of options by retail investors is flagging, so the industry is looking upstream for order flow. 

Alan Grigoletto

"Growth in options is plateauing on the retail side," Alan Grigoletto, an official with the Options Clearing Corp.'s Options Industry Council, said at an industry conference in January, "There is so much more ground to be broken with wealth advisers, pension funds and endowments."

One pension plan that is taking the options plunge by writing covered calls is the San Antonio Fire & Police Pension Fund, said Grigoletto, who was speaking at the annual conference of the Chicago chapter of the Security Traders Association. The fund is turning to former market makers for help. "They're asking them to be risk managers on a portion of their portfolio-to construct an income generation strategy," Grigoletto told the STAC crowd.

Listed options were initially a product for retail investors. Then sophisticated hedge funds started using them. Now traditional money managers are exploring their benefits.

Sean Haggerty, a derivatives sales executive at Susquehanna Financial Group, speaking at the same conference, noted the long-onlys tend to do plain-vanilla buy-write strategies.

"They are looking to enhance their rates of return," Haggerty explained. "And because they don't want the tax consequences of having the stock called away, they use far out-of-the-money calls."

Buy-write strategies involve selling call options in amounts that match the notional value of a given portfolio. Investors receive a cash "premium" with the sale, which is attractive to money mangers seeking yield. Covered call writing is considered one of the simplest, and most conservative, options trading strategies.

Studies show that buy-write strategies outperform buy-and-hold strategies with less risk. One of the most recent studies was conducted by the University of Massachusetts and sponsored by the Options Industry Council, a think tank for the industry.

The university's analysis, using the Russell 2000 as a benchmark, "suggested" that the strategy's return over the years between 1996 and 2011 bested that of the index itself. The authors of the study, however, noted that the "method of execution of the strategy as well as the choice of the options" has a big impact.

Grigoletto noted that these are still the early days of options trading by pension plans and endowments. Many lack an understanding of the product. Still, with stock market returns depressed in recent years, the fund managers are seeking to enhance their returns.

Although progress in convincing the long-onlys to trade options has been slow, the reception from the fund managers has improved over the years.

"We're just scratching the surface," Grigoletto said, "but, in the past, all you got was a stiff arm."

 

(c) 2012 Traders Magazine and SourceMedia, Inc. All Rights Reserved.
http://www.tradersmagazine.com

http://www.sourcemedia.com/