NEW YORK (Reuters) - After the financial crisis of 2008 hit their stock portfolio hard, Colorado Springs information technology contractor Mark Brisley and his wife Evie Petrikkou were worried.
Casting about for a way to make up big losses, the two hit upon a strategy often considered the purview of Wall Street insiders: They could trade options.
Brisley began with the basics, buying and selling “puts” -contracts that convey the right to sell a stock - to earn a little bit extra and protect the family portfolio from another debacle. Initially, he didn’t dabble in “calls” - contracts that convey the right to buy a stock.
Now, five years later, he is a habitual trader who has embraced increasingly arcane options strategies. “We treat it almost like a business,” says Brisley, 51.
Brisley may be the new typical options player - a do-it-yourself investor with a touch of gray.
The average options trader now is 53 years old; 28 percent of all options users are between the ages of 55 and 64, according to the Options Industry Council, a trade group. And those mom-and-pop enthusiasts have pushed trading volume up 16 percent a year (by number of contracts) for the past decade, according to the Chicago-based OCC, the world’s largest equity derivatives clearing organization.
When Fred Tomczyk, chief executive of brokerage firm TD Ameritrade, recently went to an investor education class on options trading, he noticed the crowd around him. “It was all people who look like me,” Tomczyk, 58, told Reuters in a recent interview. “It was older people who are about to retire or just retired.”
Jared Levy, author of “Your Options Handbook” and managing partner at Belpointe Alternative Investments in Greenwich, Connecticut, says it is no surprise that baby boomers are driving the options train. “A lot of the increasing volume has been coming from boomers with high net worth who have gained the ability to trade from home.”
Brokerage firms like Charles Schwab Corp, E*TRADE and TD Ameritrade have attempted to capitalize on that interest by building up their options trading platforms or acquiring others. Schwab bought optionsXpress Holdings Inc in 2011, and TD Ameritrade bought thinkorswim Group Inc in 2009.
But retirees should think twice before trading in their tennis rackets or bridge games for an options-trading hobby. Options are complex derivative instruments that may protect your portfolio and let you squeeze in some extra earnings - or cause you to lose your shirt and your pants along with your stock holdings.
Most options plays allow traders to maximize their bets, and individual investors are notoriously bad about timing those bets in the first place. In fact, a recent analysis of more than 200,000 investors done for Reuters by online financial planning platform SigFig revealed that those who did not trade options thumped those who did. Investors who stayed away from options racked up 13.2 percent in portfolio gains for the year ended June 25, while those who embraced the options trade lagged by 6 percentage points, with returns of 7.3 percent.
In their basic form, options contracts are known as puts and calls. The buyer of a put has a right to sell the asset (like 100 shares of a stock or exchange-traded fund) at an agreed-on price. That could provide downside protection if the asset plummets in value. A call conveys the right to buy shares at an agreed-on price.
Say, for example, you own 100 shares of a company trading at $50 a share. You could sell a 90-day call at a $60-per-share strike price, for $200. If the stock goes down, you’ll keep the $200 and the call will expire. If the stock goes up to $58, you’ll keep the shares, the $200 and the $800 gain (on 100 shares). Again, the call will expire.
If the stock goes up to $75, you’ll keep the $200 and the $10 per-share gain between $50 and $60. But you’ll lose the extra $15 per share in gains because you’ll have to sell the stock at $60 a share - it will have been “called.”
Management consultant Thomas Manning of Lynnefield, Massachusetts, another options-trading elder, takes a conservative approach. He does about 100 options trades a year, mainly buying puts and selling calls, and limits the amounts involved to between 5 percent and 10 percent of his portfolio.
“The only way you’re going to hit home runs is to focus a whole lot of capital in a particular area, and that is very risky,” says Manning, 57. “I like to aim for singles and doubles instead.”
(Follow us @ReutersMoney or here; Editing by Linda Stern and John Wallace)
The writer is a Reuters contributor. The opinions expressed are his own.