Running With the Pack - Part 3

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...continued from Part Two

INDEX OPTIONS
Although the endless competition between the exchanges has been problematic, one positive side effect has been the impressive array of new products that is launched every year. For financial planners, one of the most interesting new products is the option on the SPDR ETF. ìThe new SPDR options are ideal for financial planners,î says Leibler. ìThey provide many of the same advantages of full index products at a fraction of the cost. Another advantage of the SPDRs is that, unlike the full index options, they are not a proprietary product owned by one exchange. SPDR options are traded on every major options exchange, providing the customer with tighter markets and many more choices in terms of price and execution.î

Index options have long been the preferred hedging tool for financial planners. The reason for this is quite simple. Instead of having to sell calls or buy puts against every stock in their portfolio, they could use one product to hedge their entire portfolio. The index of choice for most portfolio managers is the benchmark S&P 500. However, numerous hurdles had to be overcome before a planner could trade S&P options. The main hurdle was cost. Options on the full S&P index are extremely expensive. This put them out of reach for many financial planners and their clients. Another hurdle was choosing between the cash-settled options at the CBOE and the futures-settled options at Chicago Mercantile Exchange (CME). These products, while similar, are not identical and can cause countless headaches if they are mixed together in a portfolio. In addition, if a financial planner wants to trade the underlying against his S&P options, then he would have the added hassle of opening a futures account alongside his equity and options accounts.


THE SPDR
All of that changed when the SPDR options were launched. It was a watershed event for the options markets. This was the first time that a major index product was simultaneously launched on six exchanges. ìWe launched the SPDR options on January 10th amidst a great deal of media furor,î says Brodsky. ìSo far, they have proven to be an immensely popular product which has tremendous appeal for financial planners. There is a great deal of demand for this low cost index product.î

As most of you already know, the SPDR ETF is one-tenth the size of the full S&P 500 index. The reduced size of the ETF translates into option prices that are roughly one-tenth of their full-sized counterparts. The obvious cost savings of these smaller options has made the products very popular with both financial planners and their clients. Unlike the full-sized options, SPDR options offer strike prices in ten point intervals. This opens up a new world of hedging and speculating possibilities that arenít possible on the full index. In addition, since the options are derived from an ETF, anyone with an equity account can trade the underlying. That eliminates the hassle of having to open a futures account in order to hedge your options. The nearly endless possibilities of this product have injected new life into a segment of the options industry that was in dire need of rejuvenation. ìWe are extremely excited about these products,î says Andreesen ìWe think the SPDR options will be viewed as the most important new options product to come along in years. Compared to the full S&P option, they are much cheaper and easier to use. That makes them perfect for both professionals and the investing public alike. Who knows, they might even become bigger than the options on the QQQs.î

THE WOLF IS KNOCKING
For financial planners, the writing is on the wall. The days when you could specialize in one asset class and still maintain a large client base are long gone. Clients are demanding more investment opportunities and new ways to protect their existing investments. Todayís financial planner has to be well versed in a wide variety of asset classes, including options. With option volume growing every day and a host of exciting new products on the horizon, you canít continue to ignore these markets. The big bad wolf is knocking at your door. Itís time to let him inÖ


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