Options industry officials are looking to traditional money managers for growth.
According to one veteran options executive, growth in the use of options by retail investors is flagging, so the industry is looking upstream for order flow.
"Growth in options is plateauing on the retail side," Alan Grigoletto, an official with the Options Clearing Corporation’s Options Industry Council said at an industry conference yesterday, "There is so much more ground to be broken with wealth advisers, pension funds and endowments."
One pension plan that is taking the options plunge by writing covered calls is the San Antonio Fire and Police Pension Fund, said Grigoletto, who was speaking at the annual conference of the Chicago chapter of the Security Traders Association.
Listed options were initially a product for retail investors. Then sophisticated hedge funds started using them. Now traditional money managers are exploring their benefits.
Sean Haggerty, a derivatives sales executive at Susquehanna Financial Group, speaking at the same conference, noted the long-onlys tend to do plain vanilla buy-write strategies.
"They are looking to enhance their rates of return," Haggerty explained. "And because they don’t want the tax consequences of having the stock called away, they use far out-of-the-money calls."
Buy-write strategies involve selling call options in amounts that match the notional value of a given portfolio. Investors receive a cash "premium" with the sale, which is attractive to money mangers seeking yield. Covered call writing is considered one of the simplest, and most conservative options trading strategies.
Grigoletto noted that these were still the early days of options trading by pension plans and endowments. Many lack an understanding of the product. Still, with stock market returns depressed in recent years, the fund managers are seeking to enhance their returns.
Some are turning to former market makers for help, Grigoletto said. "They’re asking them to be risk managers on a portion of their portfolios–to construct an income generation strategy," Grigoletto told the STAC crowd.
Although progress in convincing the long-onlys to trade options has been slow, the reception from the fund managers has improved over the years.
"We’re just scratching the surface," Grigoletto said, "but, in the past, all you got was a stiff arm."
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