Brokerage firms demystify the use of options trading

NEW YORK - For Kim Snider, it only takes one word to send participants in her monthly investment workshops into a near panic.

The financial adviser from Dallas gets the same reaction, without fail, every time she suggests using options as a way to protect stock portfolios and make money.

"Peoples' eyes roll to the back of their heads; they are absolutely horrified," she said. "There is still a pervasive myth that options are complicated and risky."

That might be quickly changing. The options market once baffled investors, who felt using puts and calls to bet on stock moves was tantamount to a Wall Street craps game. These days, online brokerages and financial advisers are pitching more investor-friendly ways to use options - and that has led to a significant growth in their popularity.

In April, 281.7 million options contracts exchanged hands, up 43 percent from last year, according to the Options Industry Council. The high growth is part of a trend seen over the last several years, and more individual investors are taking part.

One reason for the options boom is that more individual investors are managing their investments online; options are more readily available on the Internet than when they were sold through brokers in the past. Options also feed on Wall Street volatility, which has gone up significantly in the last year.

"There's been a tremendous adoption wave among self-directed retail investors of options trading," said Don Montanaro, chairman and chief executive officer of brokerage TradeKing, of Boca Raton, Fla. "The savvy and wisest investors realize they'd gone through a whole market cycle where they adopted taking care of their own investments online, but did so with a limited amount of plays. People only knew how to buy and sell stock."

For the most part, Montanaro said, education has been the top priority in persuading his customers to use options as a tool. It's little wonder, because options contracts - which turned 35 last month - were once exclusively traded by big institutions in Chicago's boisterous futures pits.

TradeKing customers last year were mailed a step-by-step "Options Playbook" that helps instruct them on how and when to employ the investments.

The basic premise of stock options contracts is that investors bet on a stock's direction and price within a specific time frame. For instance, investors who predict Google Inc. shares will vault $100, to $600, can lock in such a wager and hope the value rises.

At the end of the contract, that would give them the right to pay only $500 when everyone else is forced to buy at a higher price - giving them an instant profit. However, stocks could easily move the other way and leave investors forced to cover the difference. Options are also used on other investments, such as commodities.

David Fisher, chairman and chief executive of OptionsXpress Holdings Inc., said most of his brokerage's 280,000 customers use options regularly. He said the demographics of the customers participating in the options market might be surprising.

"Our average customer is over 50 years of age, and these are people that are now looking for products to round out their portfolio," he said. "They didn't have computers most of their life, online investing wasn't around, and they've really had to teach themselves how to do it."

OptionsXpress helps customers get accustomed to options by letting them practice on a virtual trading floor, which is a popular feature on the brokerage's Web site. Online and discount brokerages typically charge $5 to $20 per options trade and levy a fee per contract.