For the past several years, cable TV viewers have made the show “MythBusters” a huge hit. The program takes a group of experts who use basic elements of the scientific method to test the validity of various rumors, urban legends and myths found in everything from movie scenes to pop culture to ancient history. Based on the results of the team’s tests, a myth would be either “confirmed” or “busted.”
Well, here at OptionsZone, we have our own set of MythBusters. Our team of experts is comprised of CEOs from the top options trading firms. Industry luminaries such as Tom Sosnoff of thinkorswim, George Ruhana of OptionsHouse, Wade Cooperman of tradeMONSTER, Don Montanaro of TradeKing and Stephen Ehrlich of Lightspeed, all sat down with us recently and gave us their thoughts on trends in the options market for this options trading article.
By picking their brains on a variety of issue, we uncovered 10 options trading myths that we’ve summarily declared “busted!”
Myth #1: Options trading is only for professional traders with years of experience.
Although it has long been held that trading options should be left to only the most-experienced traders, in recent years this notion has changed.
According to Tom Sosnoff of thinkorswim, “I think [options trading] has become [widely] accepted now. Five to seven years ago it was on the fringe. Ten years ago it was … an alternative investment. Now trading options with penny wide markets and the ultimate competition for order flow — it’s like trading stocks.
George Ruhana of OptionsHouse agrees. “I think that there’s no question that they [options] get accepted more every year — and especially in a year like last year, where you had some people who had been making money as options investors.”
Options trading just for the pros? Myth busted!
Myth #2: You should only trade options in a tax-deferred account.
We’re not sure how this myth got started, but it is absolutely not true. According to George Ruhana, many investors are using options in their taxable accounts to help them make big returns precisely for their retirement planning.
“You’ve got this huge baby-boomer generation that’s got a lot of net worth to invest, and they also have some time on their hands if they’re retired, to do so. So people are really involved in [options trading] and they spend a lot of time on it. Trust me, when I talk to customers, they are laser focused on returns and how they’re trading and new ways to do things.”
George added that many investors are now taking 5% or 10% of their total portfolio and actively trading it in options using both long and short strategies, and by buying and selling puts and calls.
Trade options only in tax-deferred accounts? Myth busted!
Myth #3: Option trade execution is a rip-off.
Some believe market makers have it fixed so they make the big money while the individual investor gets stiffed. This myth is simply a vestige of a market where trades were executed only by the market makers. Thanks to the advent of technology, things are done completely differently now.
According to Tom Sosnoff, “We’ve come from essentially an archaic open out cry system with non-competitive marketplaces to a very competitive multi-exchange listed, efficient world of trading. The option marketplace changes have been more dramatic than anywhere else just because of all the different exchanges competing for the same order flow.”
The reality in the options markets now is that technology combined with greater competition for trade execution has added a high-level of openness and transparency to the trade. This environment insures that options trades are executed at the best price available for virtually every trader.
Options execution a rigged game? Myth busted!