Debunking the 5 Top Myths Around Options Strategies

That said, some options-based strategies are complex which might require the use of an investment advisor or a fund manager to manage the options strategy for the individual investor. Portfolio managers would be quick to point out however, that increased complexity does not equal increased risk.  

Myth 4: "Derivative and option trading is too expensive"

In the world of high-frequency trading and market making, the cost of derivative programs can fall on the pricier side, but when considered in a portfolio context as a risk management tool (as many derivative strategies are), this cost is applied to more meaningful  downside protection.

In today's environment, where many investors perceive the biggest risk in their portfolios to be related to rising interest rates, the historical diversification properties of fixed income may be diminished by more volatility and asset price depreciation. Going forward, the risk/reward properties of option strategies may prove to be a better "asset class" than bonds in a rising rate environment. In sum, they're arguably worth any uptick in expense. 

Myth 5: "My equity portfolio is up 20% this year, why do I want to cap my upside with options?"  

While this response is far less common and primarily directed at covered call, long put option or collar strategies, some investors do believe that the equity rally will continue.  In this case, risk mitigation is critical since historically equity selloffs occur faster than the runups that precede them.  Unfortunately, these investors often believe they are capable of timing the market, which could be a less than ideal form of risk management. 

In all, we find that investors with either experience in trading options or academically driven research backgrounds are more inclined to allocate to products or strategies that employ options.  Longer-term holding periods and less concern over taxation are also indicative of greater acceptance of the value of options-based strategies. Fortunately, more and more investors, advisors and analysts are aware of the benefits of incorporating options into strategic portfolio allocations. Combined with the growing demand for fixed income substitutes and portfolio level risk management tools, interest in volatility-mitigating options strategies may be nothing more than a 10% correction away.