- 2001: Volume 10, No. 5 Options Industry Council: A Trader's Resource

Q: What is The Options Industry Council and how was it founded?
Prior to the formation of OIC, we found that there were many myths and a general lack of understanding about options in the marketplace. OIC was formed in 1992 in direct response to address misunderstandings and provide education about options. Through a unified effort from the leaders of the nation's options exchanges and The Options Clearing Corporation, OIC serves as the primary industry resource for options education. We believe OIC's resources provide both education and insight for investors to help them make well-informed decisions.

Q: Do you think the attitudes toward options have changed since OIC was established?
There is no doubt that options have earned a reputation as a viable investment alternative over the years. I think the numbers speak for themselves. Since OIC was founded, volume has grown 535 percent, year-to-date average daily volume is around three million contracts per day, and even in the current economy, we continue to see a growth in options volume over last year.

I also think, the financial press has a much better understanding about options than they did 20 years ago. The options market now receives greater media attention, which reflects that options have become more mainstream. The media has also done a good job of educating viewers and readers about options.

Financial advisors/brokerages have benefited from these strides and now view options investors as valuable clients.

Q: What do you attribute the dramatic growth in volume and change in attitude to?
I think there are several factors that come into play. In particular, increased automation, intense competition and more readily available information.

Today, there are five options exchanges that are all highly automated. They process millions of contracts in a single day--this would have been unthinkable years ago.

The competition between the exchanges makes it a good time to be an options customer. Competition has grown even more in the past couple of years. With the change to multiple listings in 1999, 80 to 90 percent of total volume now comes from these listings. All multiple listings are on two or more exchanges and some are on all five exchanges.

In addition to competitive factors, the increase in investor education has had a profound effect of options volume. OIC wants to counter the "get rich quick" people in the options world who guarantee instant wealth by using options. Options aren't about getting rich quick; they are a tool. We want options to be used properly and we're doing that through free seminars, our call center, newsletters and the Web site.

Q: Have you seen any changes in the international options marketplace?
OIC has taken an active role in internationally expanding options. We know there's a fair amount of business in Europe and in 1998, we opened an OIC London office. By reaching out internationally, we can increase business here in the U.S. In addition to Europe, OIC has entered into Pacific Rim alliances with The Australian Stock Exchange for educational materials. We have also presented educational roadshows in Hong Kong and Singapore. We see these as venues that will enable OIC to expand its reach.

Q: What strategies are options investors using in the current market conditions?
Collars can be very useful in this market when a stock's future is neutral or bearish, or when the goal is to sell the stock at the strike price of the call. It is also a good choice when the investor is wary of the cost involved with protective puts. By holding shares of an underlying stock, purchasing a protective put and writing a covered call on the underlying stock, the collar uses the proceeds from the sale of an out-of-the-money call to help pay for the purchase of a put. This gives the stock position some downside protection (below the put strike price), but retains some upside potential (up to the strike price of the call sold).

Q: Can you provide an example of a collar strategy?
Definitely. Let's say that XYZ stock is currently trading at $58 per share (we're assuming our investor owns 100 shares of this underlying stock). The investor finds a 90-day XYZ call with a strike price at $70, priced at 2.70 a share (a total of $270 per contract) and a put with a $50 strike price offered at 2.55 (a total of $255 per contract). The investor can write (sell) a 70-strike call and simultaneously purchase the 50-strike put. The resulting option position puts a "collar" around the stock's future price.

At expiration, the position breaks even at the stock price of $57.85 per share; however, below $57.85, there will be losses. The break-even point is calculated as the current price of $58 minus the net premium of .15 (2.70 - 2.55). Those losses will be completely offset below $50 per share because our investor can exercise the option. On the following business day after the exercise request, the stock will be delivered at $50 per share. That places a downside "loss limit" on the stock position of eight points or 13.8 percent from its current price of $58.

On the other hand, the position will generate profits if the stock price is above $58 per share. However, if the stock price is higher than $70 (the strike price of the short call option), another investor who owns one of the 70 calls has the right to exercise and take delivery of the stock. If that exercise notice is assigned to our investor, they will be required to deliver the shares the next business day at $70, no matter what the current market price of the stock may be. The sale of the 70 call limits the potential profit for 12 points, or 20.7 percent.

Q: Where can professional traders get more information about strategies?
A good place to start is our call center at 1-888-Options (1-888-678-4667). It is staffed with options experts who can give professional traders and individual investors insight into options strategies. OIC has a variety of free resources on its Web site, www.888options.com, including its Strategies section that lists a number of different bear, bull and neutral market strategies and OIC's brochure called, "The Equity Options Strategy Guide." OIC also offers free nationwide seminars.

Q: What advice would you give to a professional trader looking into investing in options for the first time?
Education. Education. Education. For a professional trader, the use of options can be highly speculative to very conservative. A trader would be irresponsible if he did not take the time to learn about options. He may decide options aren't for him, but he needs to learn about them first before making that decision.

Once you start to learn, it's important to understand the benefits and maximum risks affiliated with each strategy. There's a wealth of information out there about options, but it's not always good. The good information will present both the ups and downs of using options in your portfolio. As I said earlier, be wary of "get rich quick" claims. Take advantage of free information out there from reliable sources like OIC and the options exchanges. Once you start trading options don't stop asking questions and looking for information. There's always more to learn.