VielGeld
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Just read an article in last week's new Bloomberg Newsweek mag that discussed the increasing popularity of options (and futures to an extent) to the detriment of equities. ETFs are also seeing roughly 30-40% of total trade volume.
Options contract volume is up to 4 billion traded yearly. Brokers are taking advantage of this by offering expanded options services or gobbling up players. My own account was still new when OptionsXpress was acquired by Charles Schwab earlier this year, and this one is mentioned within the article.
Anyway, the idea is that brokers love this because clients pay more in commissions for options (no **** -- I lost $4k this year being stupid trading options, and 1/4 of that was commissions!). For example, equity trades are about $10 flat. But for my own trades with OXP, you paid $15 + $1.5/extra contract. Pretty ****ing expensive! (Note: I subsequently found out Interactive Brokers offers $1 option trades. Hell of a difference. You need a min. of $10k deposit, though).
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So what's going on here? Is it Wall Street that's pushing these things or is it simply another mania in the works? I think derivatives are here to stay. Who wants boring old stocks who barely give any profits when you only have $1000? I want me some leverage, baby!
I don't think a bit of leverage is a bad thing. How else can small players get a leg up when they only have a couple k to get started with? But then again there is the Casino mentality always lurking in the shadows, and I believe this is doing a disservice to investors and newbies alike. If Wall Street (and the SEC with that dumb no-day-trading-under-$25k rule) were ethical, I believe they would somehow restrict high-leverage derivatives, while promoting things like 2x leveraged ETFs as starter points if the players want a bit of action.
Let's face it -- people want derivatives. They exist because stocks don't offer the kind of leverage everyone wants. Then again, people don't really have a real appreciation for leverage and the kind of risks it poses. A solution would be to slowly introduce them to increasing leverage and provide "psychological barriers" whenever they move up. In a perfect world, as players moved up the derivatives ladder they would also have a more mature disposition towards leverage, and would perhaps get to find out that the most they can accept is 1x, 2x, 5x, 10x, ..., nx leverage in their trading.
Win-win? I dunno. What's for sure is that the markets are getting more volatile. Regardless of the purpose derivatives have, I believe it is in everyone's interest to be educated on their dangers. One of the fallacies of trading is that license to losing 10x your net worth in one bad trade is an inordinately easy thing to do when access is pretty much non-existent to even beginners. Restricting such access would be, imo, a nice start.
Last thing -- if everyone starts going for derivatives while forgetting stocks, then what's the purpose of the derivate? The market is there as a medium for the efficient allocation of capital resources to deserving entities. Turning this into a casino where bets are placed on companies rather than investing in their future is a sure way to ruin the system. We're not there yet, but the overall trend sure is in that direction.
Options contract volume is up to 4 billion traded yearly. Brokers are taking advantage of this by offering expanded options services or gobbling up players. My own account was still new when OptionsXpress was acquired by Charles Schwab earlier this year, and this one is mentioned within the article.
Anyway, the idea is that brokers love this because clients pay more in commissions for options (no **** -- I lost $4k this year being stupid trading options, and 1/4 of that was commissions!). For example, equity trades are about $10 flat. But for my own trades with OXP, you paid $15 + $1.5/extra contract. Pretty ****ing expensive! (Note: I subsequently found out Interactive Brokers offers $1 option trades. Hell of a difference. You need a min. of $10k deposit, though).
-----
So what's going on here? Is it Wall Street that's pushing these things or is it simply another mania in the works? I think derivatives are here to stay. Who wants boring old stocks who barely give any profits when you only have $1000? I want me some leverage, baby!
I don't think a bit of leverage is a bad thing. How else can small players get a leg up when they only have a couple k to get started with? But then again there is the Casino mentality always lurking in the shadows, and I believe this is doing a disservice to investors and newbies alike. If Wall Street (and the SEC with that dumb no-day-trading-under-$25k rule) were ethical, I believe they would somehow restrict high-leverage derivatives, while promoting things like 2x leveraged ETFs as starter points if the players want a bit of action.
Let's face it -- people want derivatives. They exist because stocks don't offer the kind of leverage everyone wants. Then again, people don't really have a real appreciation for leverage and the kind of risks it poses. A solution would be to slowly introduce them to increasing leverage and provide "psychological barriers" whenever they move up. In a perfect world, as players moved up the derivatives ladder they would also have a more mature disposition towards leverage, and would perhaps get to find out that the most they can accept is 1x, 2x, 5x, 10x, ..., nx leverage in their trading.
Win-win? I dunno. What's for sure is that the markets are getting more volatile. Regardless of the purpose derivatives have, I believe it is in everyone's interest to be educated on their dangers. One of the fallacies of trading is that license to losing 10x your net worth in one bad trade is an inordinately easy thing to do when access is pretty much non-existent to even beginners. Restricting such access would be, imo, a nice start.
Last thing -- if everyone starts going for derivatives while forgetting stocks, then what's the purpose of the derivate? The market is there as a medium for the efficient allocation of capital resources to deserving entities. Turning this into a casino where bets are placed on companies rather than investing in their future is a sure way to ruin the system. We're not there yet, but the overall trend sure is in that direction.
