Option Traders Starting to Use More Complex Strategies

Not only has the popularity of option trading increased again this year, the investors trading options are becoming much more sophisticated. The volume of option contracts increased by 17% this year, while the use of more complex strategies went up sharply as well.

OptionsXpress, bought by Charles Schwab & Co. in September, saw the number of options trades done by its 400,000 customers jump by 10 percent last year. Multi-leg strategies that establish directionally neutral positions increased in popularity, while those that are bullish or bearish saw less use.

“We have seen an increase in the use of more advanced strategies,” Nina Milovac, the director of OptionsXpress’ educational efforts, said at a recent industry conference. “The biggest increase was in the butterfly strategy.”

The retail broker handled 27 percent more butterfly trades in 2011 versus 2010, Milovac said. The spread trade is constructed with four options-either all calls or all puts. Two options are bought. Two are sold. A directionally neutral position is achieved.

Overall, OptionsXpress’ highly active customers boosted their use of spread trades by 18 percent over the previous year. Spreads include butterflys, condors, diagonals, verticals, ratios, boxes, calendars, and others.

The firm’s customers also increased their use of condors. Like the butterfly, the condor strategy is directionally neutral and involves four options-two long calls and two short calls, for instance. OptionsXpress saw a 9 percent rise in condors last year, according to Milovac.

The brokerage official, who spent six years as a market maker at the Chicago Board Options Exchange, was speaking at this year’s gathering of the Chicago chapter of the Security Traders Association.

Those multi-leg options trades that establish a bullish or bearish position saw flat or negative growth. Use of straddles, which involve trading both a call and a put, declined by 2 percent at OptionsXpress, Milovac reported. Overall, combos, which include straddles and strangles, were flat in 2011.

Strategies meant to hedge the risks of stock ownership got a mixed reception at OptionsXpress last year. The use of covered calls, whereby stock owners sell calls against their position, declined by 3 percent, according to Milovac. By contrast, the use of protective puts, whereby stock owners buy puts at strike prices below current market prices, grew by 17 percent. The use of collars, a combination of covered call and protective put strategies, was flat over 2010.

The options industry experienced its ninth consecutive year of growth in 2011, as the total number of contracts traded jumped 17 percent to 4.2 billion.

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