NEW YORK (TheStreet) -- Although seen as speculative and dangerous in the past, options trading has increased as investors find simple and beneficial strategies to use for their portfolios.
Average daily trading volume for options has grown about 17% a year since 1992, according to data from the Options Clearing Corp. Options trading volume has only begun to sputter this year, with average daily volume currently down about 10% from 2011.
JJ Kinahan, chief derivatives strategist at TD Ameritrade, says options trading has grown tremendously due to "increased education and public awareness." In the past, people blamed derivatives for market downturns and were discouraged from using derivatives like options.
However, as investors gain experience in trading options and understand how options can be an important part of their portfolio, Kinahan expects that options trading will continue to grow.Many people have stayed away from options because they lack understanding of different strategies and fear losing money through speculative strategies. However, Robert Luna, CEO and chief investment officer at Surevest Capital Management, says options can be used as a protective strategy and are "not purely a speculative vehicle." Especially in the current market, it is "worthwhile for investors to look at some types of hedging strategies including options," says Mike Binger, senior portfolio manager at Gradient Investments. Even unsophisticated investors can use different option strategies to hedge against individual stock positions or an entire portfolio, he says. Luna agrees that options can be a useful investment tool in the current market. "Simple asset allocation is no longer working, due to high correlation in the market, and investors need better ways to protect against downside risk," he says. Option strategies can provide some protection from downside risk, or at least alleviate some risk through premiums. "Options allow for greater moves in stock prices than investors anticipated," Kinahan says, because options can give investors steady returns and more protection. Kinahan says options also allow investors with small amounts of capital to participate in the market. "Most investors can't buy Apple (AAPL) -- it's too expensive -- but options allow smaller investors to express their opinions about stocks like Apple."
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