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When It Comes to Options, Few Investors Understand Their Options

^{Published on 2011-01-06 08:35:57 - Market Wire}
 

OMAHA, Neb.--([ BUSINESS WIRE ])--Iron condor. Butterfly. Straddle. Put. Call. Despite a more than 400 percent increase in the average daily volume of options traded in the past ten years, these terms have little meaning to many American investors who remain unaware of the potential benefits and risks associated with adding options to a diversified portfolio. According to a new survey from TD Ameritrade Holding Corporation (NASDAQ: AMTD), more than three-quarters of self-described abuy and holda investors have never bought or sold options.

"Despite an increase in the tools, educational offerings and research available to help individual investors of all experience levels better understand the risks and benefits of trading options, many still view them as too complex and risky"

The reasons are not surprising. One in three respondents (34 percent) claim that options are atoo risky,a another quarter say they adona™t need them,a and yet another 23 percent admit they adona™t know how they work.a Furthermore, abuy and hold investorsa are much less likely to say that options are averya important to a diversified portfolio (12 percent) than aactive investorsa who claimed the same (38 percent).

aDespite an increase in the tools, educational offerings and research available to help individual investors of all experience levels better understand the risks and benefits of trading options, many still view them as too complex and risky,a said Joe Kinahan, chief derivatives strategist for TD Ameritrade. aThis survey tells us that while the tools are available, more education is necessary to help dispel some of the amythsa™ that continue to exist with respect to options.a

Myth #1 a" Options are too risky for the average investor

Ita™s true that options are not suitable for all investors as they are subject to unique and sometimes significant risks, and there are important differences in the risks involved in options trading compared to stock trading or investing. However, many investors do utilize options to help manage the overall risk in their portfolios.

For example, some investors use what is known as a aprotective puta to help protect a particular long stock position from the potential decline in price in an uncertain market environment for a set amount of time. In this case, an investor might purchase one put options contract for every 100 shares of a stock that he or she owns. The put gives the investor the right to sell the stock at a pre determined price (the strike price), for as long as the option contract is in force. Additionally, if the price of the stock declines below the strike price of the put, the price of the option will increase, possibly helping to offset losses in the stock.

With the protective put strategy, while the long put can provide some temporary protection from a decline in the price of the corresponding stock, if the price of the stock stays where it is or rises, the investor risks losing the entire amount of money invested in the option.

Myth #2 a" Options are only for active or sophisticated investors

When asked, aHow much do you know about options,a 42 percent of buy and hold investors surveyed said ajust a little,a compared to the 33 percent of active traders who said aa fair amounta or the additional 20 percent who said aa great deal.a

The truth is that options can be used to help pursue both short- and long-term investment goals. Buy and hold investors can utilize options to pursue a goal of income generation or capital preservation, or to help reduce exposure to market volatility. In addition, while the IRS does place some restrictions on investments in individual retirement accounts (IRAs), some conservative options strategies are generally allowed.

Myth #3 a" Options are too complex for the average investor to understand

With the right education from a credible source, learning how to use options can be readily understandable. Traders and investors new to options learn the basics, and then consider adding more complexity and risk based on their own goals and risk tolerance. Many firms, like TD Ameritrade, offer access to [ free educational webinars ], seminars and tutorials on topics for the novice to the sophisticated options investor.

Like any investment product, investors need to decide for themselves whether options are right for them. To learn more about the risks and benefits associated with trading options, visit [ www.optionseducation.org ]. Or to take advantage of TD Ameritradea™s educational offerings, including programs focused on trading options, please visit [ http://www.tdameritrade.com/trade/options.html ].

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading privileges subject to TD Ameritrade review and approval. Please see our Web site or contact TD Ameritrade at 800-669-3900 for a copy of Characteristics and Risks of Standardized Options. Carefully read and understand this document before investing in options.

Supporting documentation for any claims, comparison, statistics or other technical data will be supplied upon request.

Past performance of a security or strategy does not guarantee future results or success.

AMTD-G

Survey Methodology

These results are based on a telephone survey conducted for TD Ameritrade Holding Corporation by Market Probe from May 21, 2010 through June 19, 2010. 650 respondents participated in this survey. Respondents were polled from a random sample of affluent US households. To be eligible for this survey, respondents had to have an account at a brokerage or mutual fund company, at least $5,000 in marketable securities or cash and bought or sold securities at least once in the past 12 months. The margin of error in this survey is 3.8%. This means that in 19 cases out of 20, survey results based on 650 respondents will differ by no more than 3.8 percentage points in either direction from what would have been obtained by seeking the opinions of all eligible investors. TD Ameritrade and Market Probe are separate, unaffiliated companies and are not responsible for each other's products and services.

About Market Probe, Inc.

Market Probe, Inc. is a global market research firm specializing in full-service strategic guidance and stakeholder solutions. The corporate office is located in Milwaukee, Wisconsin in the US, with full-service research offices in Canada, United Kingdom, Belgium, Dubai, India, Singapore and China. For information, please visit [ www.marketprobe.com ] or contact Market Probe at 414-778-6000.

About TD Ameritrade Holding Corporation

TD Ameritrade Holding Corporation (NASDAQ: AMTD), through its brokerage subsidiaries,⁽²⁾ combines innovative trading technology, easy-to-use-and-understand [ trading tools ], investment services, investor education and superior client service to create a market-leading financial services experience. Now home to the award-winning thinkorswim trading technology⁽³⁾ and the Investools investor education program, TD Ameritrade provides millions of retail investors, traders and independent registered investment advisors with the tools, service and support they need to help build confidence in todaya™s rapidly changing market environment. For more information and resources for journalists, please visit the TD Ameritrade newsroom at [ www.amtd.com ].

⁽¹⁾ The Options Clearing Corporation, November 9, 2010, [ http://www.theocc.com/webapps/historical-volume-query ].

⁽²⁾ TDAmeritrade, Inc., member FINRA ([ www.FINRA.org ]) /SIPC ([ www.SIPC.org ]) /NFA ([ www.nfa.futures.org ]), and TDAmeritrade Clearing, Inc., member FINRA/SIPC.

⁽³⁾ thinkorswim, prior to joining TDAmeritrade, earned 4.9 stars, the top score, in the category "Trading Technology", and was rated #1 overall online broker in Barron's ranking of online brokers, 3/15/2010. thinkorswim was evaluated versus others in eight total categories, including trade experience, trading technology, usability, range of offerings, research amenities, portfolio analysis and reporting, customer service and education and costs. thinkorswim topped the list in 2006, 2007, 2009, and 2010 with the highest weighted-average score. Barron's is a registered trademark of Dow Jones & Company © 2006-2010.