I do not write about options that much, nor do I use them that often. This post I wrote last year illustrates my thoughts and they have not evolved much since then. Options are expensive to trade, both from a commission and spread perspective, and they are much less liquid than their equity counterparts.
On a whim, I decided to attend the Montreal Exchange’s Options Education Day in Vancouver last Saturday. Once in a blue moon, I try to attend something in-person to just get a feel for the environment and see if I can learn any tidbits of information. Since this conference was sponsored by the exchange itself, I figure that it wouldn’t be too scammy in terms of having people promote perpetual money-making machines. This assumption was somewhat true – there was some reflection on risk, but not too much. The cost to get in was $55 plus HST, so that probably filtered out the completely degenerate. It was at the Fairmont Vancouver and included a (average) buffet lunch, and all the coffee you could drink. I had no problems with the venue – it was spacious and the service was excellent.
After the end of the presentations, which went for the better part of the morning and afternoon, I did not learn too much that I didn’t know already. In no particular order here are some tidbits:
* CIBC (one of the sponsors of the event) is still struggling to come up with an investment brokerage platform that can compete against Interactive Brokers. Their interface looked oddly early 2000’s in look and feel as they were navigating through it in a presentation.
* I was left with the impression that selling covered calls and puts was effectively free money. It is mostly certainly not. In particular, one presentation was mostly dedicated towards the notion of selling puts instead of purchasing stocks through limit orders and “generating a 1/2 to 1 percent discount per month on your order”. What they conveniently omitted was the fact that if the stock goes under the strike price, in a limit order you will get your fill right there and then, while on a short put option trade you pretty much have to wait until expiry in order to figure out whether you’re going to be owning the stock or not, and this time difference is materially crucial.
* I was left with the impression that taking a long call option (at varying strike prices) in a low volatility option with two months to expiry can lead to similar upside and lower downside compared to just flat-out buying the stock. The analysis of this particular presenter was reasonably good, but what was missing was that a low volatility option would not be expected to have the underlying stock go plus or minus 10% in the first place in a couple months.
* One particular example focused on a short-term option in Manulife. I forgot the exact strikes but it effectively involved paying 20 cents extra for exposure on a $20 stock, but they conveniently forgot to mention that Manulife paid out a 25 cent dividend between the hypothetical purchase price and expiry of said option, which changed the “no-brainer” proposition and made it effectively more expensive.
* There was no discussion at any time of the actual mechanics of trading options, including costs of trading, and dealing with the awful bid-ask spreads on most of the issues trading on the Montreal Exchange (which desperately needs competition).
* There were about 65 people there, about 55 of them were men, definitely skewed toward those that have more grey hair than I do.
* There does seem to be an obsession about “yield” and “income”, which I think is true for the overall market.
* At no time did the notion of fundamental analysis of the underlying securities ever factor into any discussion, nor, more relevant for options trading, any relevant discussion as to what determined the implied volatility or factors that could change volatility. Almost all the discussion on trading was of a technical analysis nature.
In general, I could easily see without more foundational knowledge, how less educated investors could be convinced that options trading could be beneficial for them, and probably over-engage with it. Options trading seems to solve a problem in people’s portfolios that they do not have – guess whether the stock is going up or down is difficult enough, let alone trying to figure out the probability distribution of future prices over time!
I’d be much more curious about how the market makers fare and get insight from their perspective. I know Interactive Brokers’ market making division (Timber Hill) got out of the options market making business a few years ago, citing that they were not able to make money because they got killed by people that had more information than they did on underlying companies.