Deciding when and how to start investing in options is not always an easy decision. Anthony Okolie speaks with Jason Hnatyk, Client Education Instructor with TD Direct Investing, who debunks some common misconceptions about options. TD Direct Investing is holding options month in June. Click here to learn more and register: https://www.td.com/optionseducationmonth
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- Some investors think options trading might be a little too much for them, and they'd rather stick to traditional stock trading or mutual funds. However, despite the risk, options can be a good alternative for investors looking to add new assets to the portfolio or even to branch out their investing strategies. Joining us today is Jason Hynatyk, client education instructor with TD Direct Investing, who's here to demystify options trading. Jason, one of the complaints you often hear about options trading is that it's just too risky. What's your take on that?
- And while it's true that some options trades can carry significant risks, you can't paint all options with the same brush. I want to step back and say that you need to understand what risk that you're willing to take on as investors, but you also need to understand the risk the trade that I'm entering into is going to present to me. So two things you need to consider.
But when we're talking about options kind of at their most basic level, just buying long calls or buying long puts, they actually carry less risk than owning the shares themselves because you're not having to invest all of your own capital to go ahead and buy the shares. You are investing what can be a very small fraction of money to just buy the premium, to get the right to buy or the right to sell the shares, so right there upfront. You're risking less money.
And then second to that, if you own stock, you're at risk dollar for dollar as the stock goes down, but the nice thing to note when you have an option contract that you've purchased is that you have-- it's risk defined. So not only you're not spending as much money up front, you now know the maximum amount of money that you can lose. So that's a benefit.
And then further to that point, options do offer you some risk mitigation. You have the ability to actually put them to work, kind of like stock insurance. So you have the ability to buy a put. That's going to lock in a price that you're going to sell your assets, and you can either use that as a hedge for your entire portfolio. You have the ability to maybe choose an ETF and buy a put on that so that it would maybe mimic your portfolio, or you can hedge against a particular position. So options actually have an ability to actually remove risk, which is so contrary to the myth that a lot of people believe.
- And what do you say to investors who believe they just don't have enough money to trade options?
- Right, and that's something I hear very frequently in the classes that I teach, and it's very similar to the question about the risk is that not only are you risking less money up front, because you have a smaller percentage in the premium that you spend, but you actually have elements of control in your favor to actually limit the amount of money you might need to spend in the future.
One element of control is that you have the opportunity to control if you ever want to touch the stock. Many investors are buying and selling options without ever turning them into-- or exercising, as we call it-- and turn them into shares so you're not having to spend that money if you don't elect to need to.
The second element of control is the opportunity to exit your option position if you're in a profitable or if you're even on a loss position. So what I mean by that is that for instance, if you've bought a call, and you're bullish on a particular stock, you think that it's going to go up. Well, if in fact that it does go up, you have the opportunity to sell to close on that call that you've bought. And that premium will be ideally higher than what you paid for therefore locking you in a gain without spending all that additional capital to own the stock.
The next point around cash, if you don't happen to have the money that's in your margin account to do the trade, but you happen to have funds in one of your registered plans. So maybe that's your TFSA, that's your RRIF account, or your RSP. So not only are you getting the extra flexibility that options present in-- you can trade them in those accounts. But you're actually going to be able to take your trade to where you've got the money. So it gives you some versatility in your kind of investor toolkit.
And the last thing I'll mention around the kind of misconception around not having enough cash is, some option trades you can actually process and complete without spending any money at all. You're actually bringing in cash into your account. One of the more kind of basic strategies that you don't take on a lot of additional risk is-- one that I'm thinking about is called a covered call.
So you're selling calls against shares that you already own in your account. You're not taking on any extra risk, but the nice thing about that you're actually bringing premium into your account. You're increasing the cash flow and you're increasing-- maybe you're supplementing a dividend that the stock may or may not pay. So not only you're not spending money, you're actually bringing money into your account. So that can be a big benefit.
- And I'm glad you talked about some of those strategies that you have with options. I think another big complaint that investors typically mention is that we just don't have enough time to learn about the options market. What do you say to those investors?
- I would say that's a fair point. And especially with the world today, we seem to have competing priorities, and there's not always enough time in the day to execute on all of them. But there are a few quick, simple strategies that we can employ to make the most of our time.
The first would be that you don't need to be at your computer. You don't need to be tied to your desk. Through TD Direct Investing using the TD app, you can take the full functional trading in WebBroker for options. You can take it on the go with you in the TD mobile app. Whether or not you're monitoring your positions, you're getting quotes through the option chain, or you're executing your executing your trades, the app is going to be there to support you. You'll have it in the palm of your hand ready to go whenever you need it.
OK. Second point around time would be around the research. I want to kind of dispel the myth that it's going to take you extra time to research options as opposed to just stocks, because ultimately, you can think of options as an extension of stocks or ETFs. That will allow you to do your research on your stock, understand, what's my market sentiment? Am I bullish, bearish, or neutral? And kind of what time horizon am I expecting those changes in prices to execute on?
That research that I've done is already most of the heavy lifting that I need to get done. I don't then need to do additional research. I can then find the option strategy that's going to work for me. So you're not needing to double dip on the research. You've done it already with your stock research.
And then one other point I want to put to you about the time it's going to take to kind of monitor your trade. Certainly, it's not advisable to stick your head in the sand with any sort of investment that you're making. But if you've purchased something from a long-term perspective, you've got time to-- you're not planning on buying and selling it next week or even the month after that. You've purchased time. And you're looking for things to happen over that longer period of time. So the options, just like long-term stocks, you're not going to have to be necessarily checking on a daily basis, but you've got the ability to through the app and make sure that you monitor them to stay informed.
- And finally, some investors feel that options trading is just way too difficult to understand, but you say this isn't the case. Why is that?
- Yeah, that's an excellent point. And what I would like to say about that is that just because I'm not an expert, that doesn't mean there's not something in it for me. Just because I can't drive a golf ball 350 yards straight as an arrow down the fairway just like a professional, it doesn't mean that I'm not going to go and enjoy round of golf.
Options, especially the learning options for the first time, can be a daunting task, but understanding that here at TD Direct Investing, we're there to support you through your learning journey whether or not you're beginning investor, or if you are a more seasoned option professional, if you will. We have online resources available from on-demand videos, all the way through to instructor-led courses, to teach you about options theory, about options strategy, as well as how to practically apply it to our platform. So we've got you covered there with lots of resources to suit your needs.
- And of course June is Direct Investments Option Education Month. Jason, what can attendees expect to hear next month?
- Yeah, you're right. We're kind of rounding the homestretch and getting Options Education Month ready. Options Education Month is our second annual month-long blitz on options content. Lots of courses, from the more basic learning opportunities to finding out what is an option all the way up to more sophisticated strategy and platform-related courses.
So typically we're going to have three, four, classes on a monthly basis. Well, coming up in June, we've got over 50-plus hours of classes for people to come in and join us and learn and dip their toe into the options pool and hopefully learn along with us along the way. It's going to be a busy month, but there's lots of opportunities for people to learn. I'm excited to get started in a couple of weeks in June.
ANTHONY OKOLIE: Jason, thanks very much for joining us.
- Thank you, Anthony.
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