For Retail Investors, Options Are No Pot o' Gold

Monday, 27 May 2013 10:15 AM

By Dan Weil

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Discount brokers such as E*Trade, Ameritrade and Charles Schwab have launched significant ad efforts to convince customers of the virtues of options.

“We’re looking for newcomers who want to get serious,” Schwab states on its Web site, The New York Times reports.

But the game apparently isn't turning out so well for investors. People who didn't trade options last year received investment returns about five times higher than those who did trade options – 5.1 percent to 1.1 percent.

That's according to a study performed for the Times by SigFig, which follows 200,000 retail investors.

Declassified: ‘Financial War’ Could Wipe Out 50% of Your Wealth

But things are working out well for some of the brokers. At Ameritrade last year, about 40 percent of all customer trades consisted of derivatives, more than doubling in five years, the paper reports. The bulk of those trades came in options.

Academic research indicates that options traders don't do as well as stock traders, who, in turn, don't do as well as buy-and-hold investors.

“You can very clearly say in the aggregate, this [options-trading] doesn’t help individual investor portfolios,” Daniel Dorn, a business school professor at Drexel University, told the Times.

But a proposed tax change might push the kibosh on options trading, says Andy Nybo, head of derivatives at Tabb Group.

"The biggest impact will be felt by asset managers and mom and pop investors that are increasingly using options to earn premium income and manage price risk in their equity holdings,” he told The Wall Street Journal.

Declassified: ‘Financial War’ Could Wipe Out 50% of Your Wealth

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