Using options to protect against declines

November 17, 1996|By George Gunset | George Gunset,CHICAGO TRIBUNE

"Like is not enough," Alex Jacobson tells his class. "You have to love the stock."

Appreciative laughter rolls from the attentive, mostly male, audience of 100 or so would-be stock options investors in a downtown Chicago hotel meeting room recently.

Jacobson, for one of 200 times a year around the country, is describing what is probably the simplest transaction in options trading: buying a call.

"You can benefit from rising prices with a small cash outlay with limited risk, but you really have to be bullish on the stock," he says.

Calls, if you recall, are options that give the buyer the right to purchase a stock at an agreed-upon price (strike price) during a certain time period. The right to sell a stock is called a put and can be compared with insurance.

The class wants to join the 5 percent to 7 percent of individual stockholders estimated to use options as a tool for portfolio management.

They have a wide choice: There are five exchanges that list options on thousands of stocks and dozens of stock indexes, which one leading trader, Harry Roth, chief options strategist for Cowen & Co., characterizes as "more than enough for now."

Some consolidation has begun as the New York Stock Exchange, which accounts for the least options activity, is negotiating to sell that business to the industry leader, the Chicago Board Options Exchange.

The CBOE's chairman, Duke Chapman, believes further combinations are likely when the inevitable market downturn increases cost pressures.

"The biggest negative the options industry faces is a sustained market decline, and every day that passes brings that closer," he said. "For the longer term, the outlook is positive."

Options had fallen into disfavor after the 1987 stock market crash, when investors pursuing risky strategies had suffered severe losses. Risk and reward are still finely balanced, the unwary can be trapped and brokerage costs can limit gains. Used wisely, however, options can increase investment value and protect against market declines.

"Business has been rebuilt in the last decade, and we now have a solid foundation for future growth," said William Floersch, exchange vice chairman and top member-elected official. "Volume has been running at near-record levels."

At the options seminar, Jacobson goes on to explain the complicated strategies that can be used to increase investment income, protect portfolio value and, yes, provide an outlet for speculation.

He is a vice president with the Options Institute, the education arm of the Chicago Board Options Exchange, and teaches under the auspices of the Options Industry Council, an umbrella group of the nation's options exchanges. Since 1992, council seminars have attracted 20,000 investors and brokers. A print and broadcast campaign has generated 150,000 inquiries for videotapes and literature.

"Like the clothing store commercial, we say an educated investor is our best customer," said Paul G. Stevens Jr., council president and president of the exchanges' clearing organization, the Options Clearing Corp.

"We want to increase the number of individual stockholders who use options, which probably is around 5 percent."

He believes the council's $2 million annual effort should get part of the credit for the increase in equity options trading -- running at a record average daily volume of more than 750,000 contracts this year through Sept. 30 -- but acknowledges that because options are derivatives, a healthy stock market is key to volume.

Stevens said research indicates that the profile of a typical option user would show an investor between ages 33 and 35, higher than average education, higher income and a more active stock trader.

A Yankelovich Partners survey of investors for the council found options users have incomes averaging $167,800, about 43 percent higher than nonusers, while total value of their investments was $752,700, vs. $590,500.

Trading in options on individual stocks has continued to expand, while index options volume has slipped. The CBOE, which accounts for more than 90 percent of index options trading and more than 60 percent of stock options, posted a record total of 183.9 million contracts in 1994.

That slipped about 3 percent last year, and volume is down 2.6 percent through the first nine months of 1996. While index contract volume (the CBOE trades 35 indexes) dropped 15 percent, to 67.1 million, in the January-September period, volume in individual equity options (the exchange has more than 800 listings) has increased by 15 percent, to 65.2 million.

When the number of the nation's options exchanges drops to four, "competition will remain fierce," Floersch said. "I see no immediate prospects for further consolidation."

Previous proposals have been rejected. In 1993, the CBOE offered to buy the Philadelphia Stock Exchange, seeking that market's successful currency option complex.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.