Stock options are on the rise among investors with the stock market rocking and rolling with volatility. A call option gives you the right to buy a stock and a put option gives you the right to sell a stock. To see how to make use of these mechanisms, we turn to an expert on the subject, Steve Sears, president and COO at Options Solutions in Chicago.
(Forbes: Larry Light)
Larry Light: Stock options have surged in popularity in recent years. Why?
Steve Sears: Since the global financial crisis of 2008 and 2009, investors have learned that volatility is either something that happens to them or something that they can try to do something about. Puts and calls offer investors the ability to do something more than just get bounced around by Mr. Market. This is one key reason that so many investors feel that options are no longer optional in their portfolios.
There is another key reason, too, and it is not well understood. Many investors have learned—through difficult experience—that what they were told to do by Wall Street has not turned out as expected.
Light: Like what?
Sears: Huge swaths of people have now amassed significant first-hand experience investing and they are comparing what has happened with what they were told would happen. Remember, Main Street’s embrace of Wall Street is a relatively recent phenomenon that began in 1975 when fixed commissions ended and it was no longer prohibitively expensive for most people to buy stocks. The introduction of electronic trading and brokerage firms, which has really occurred over the past 20 years, has helped to bring Main Street into deeper into Wall Street’s embrace. Yet, John and Jane Investor’s account balances often lag what they were told to expect.
This is one reason why, as we have discussed before, that so many people are ill-prepared for retirement, and thus forced to own more equities than they should at an age when they should be reducing risk. Now, as the Federal Reserve raises rates, and stock prices are convulsing lower, many people in and around retirement are extremely nervous because their nest eggs are shrinking.
Light: Most people think that options are mostly used for aggressive speculation rather than for the more noble ideals you espouse. What’s the disconnect?
Sears: The simple fact of that matter is that most people, and many reporters, understand aggressive speculation much more than they do how to responsibly invest. There is a financial literacy crisis in America that is often ignored, and even less addressed, because it is difficult to cure and hard to discuss. Besides, meme-stock mania is a catchier storyline than a piece on the importance of dividends to historic stock returns, or ways to reduce risk.