Peter-Wong

To write and trade options for clients, you need to get licensed. So consider an options license, which is administered by CSI.

To get that license, you can either take one comprehensive or two shorter courses. The process can take less than a year to complete, but each course has a maximum one-year enrolment period (see “Certificate at a glance”).

We talked to two advisors who each say they got their options licenses so they could offer more complex investment strategies to clients. They also wanted to understand how and why newer structured products use derivatives strategies.

Here’s a look at the process they went through.

Getting my options license

After more than 20 years as an advisor, Peter Wong decided to enhance his service offerings.

“I had often talked about getting my options license,” says Wong, a portfolio manager at Raymond James in Vancouver. He did so in 2013 in response to demand from accredited clients, including one long-time investor who wanted to hedge his gold exposure.

Before Wong could trade options, that client used gold warrants (similar to call options), which give investors the right to purchase shares at a fixed price. But the Canadian market for warrants is small, and the client wanted to generate more income through an options strategy. Plus, many of Wong’s younger colleagues were taking derivatives courses, which are part of the options license. “That inspired me to work harder,” he says. “Without being licensed, I risked losing business to another advisor or, even worse, losing clients’ entire portfolios.”

So, to get licensed, he took two courses: the Derivatives Fundamentals course and the Options Licensing course. The total cost was about $1,300 (advisors can also take the single course: Derivatives Fundamentals and Options Licensing for $1,100, but most prefer to take them separately and spread out the studying load, even though it costs more). But Wong didn’t stop there—he completed a full certificate in derivatives market strategies (DMS certificate) by taking three extra electives, and got his CIM.

For the extra DMS courses, Wong chose classes on futures, commodities and technical market analysis, and those cost between $500 and $700 each.

The derivatives fundamentals courses provided more detail on common financial theories and formulas, says Wong, adding that the technical analysis and commodities courses offered more practical information.

He found the commodities course most helpful, since a large portion of the TSX is made up of resource-related companies.

Completing the certificate took nearly two years and more than 200 hours of studying, he adds. “Since I still worked full days, I had to make time to study after work and during the weekends.” And, he often chose to stay at the office to avoid distractions.

Prior to taking the tests, he also took two practice exams that cost about $200 each.

Meanwhile, Nicholas Aristeo, a discretionary portfolio manager and vice-president at 3Macs in Montreal, Que., started the process to get his options license shortly after joining the sales team of his firm in 2008.

He had both his options license and CIM by 2011. “Once I was into studying, I just didn’t stop,” he says. “I saw an opportunity to properly service clients and market to prospects, and I wanted do anything for [them].”

Aristeo adds, “Options and derivatives are an important part of the financial market. I think everyone should have an options license.”

What it’s done for me

While building his book, Aristeo found clients were getting smarter. “They’re hearing about options strategies and want to know about [derivatives]. And, in this very competitive market, you have to differentiate yourself.”

So once he got his license, he began educating his wealthiest clients on how options strategies work. “We tell them we write calls to get out of positions, and we write puts to get into [or add to] positions. We’re very plain vanilla. These strategies are risk-mitigating.”

If a call option isn’t exercised, Aristeo says he’ll still own the stock he’s written against. But the main point he explains to clients is that call options allow them to hedge positions and increase yield.

However, some investors “still abstain [from using them] since, to many people, options is a dirty word; [to them] it means you’re speculating. But we use options to protect people’s portfolios.”

But you can still make mistakes, says Aristeo. Several years ago, he bought shares of fashion accessory company Coach, Inc. and wrote call options on that position. “But then the stock got hammered after the company reported very negative [earnings].” He explains that, because the call options were exercised when the stock was dropping, his clients ended up with a loss for that position.

“[Still,] because Coach is very volatile, we got huge premiums for writing. And, while the stock stayed down at lower levels, we kept writing [calls] against our position. By doing that for six to seven months, we recouped all of our losses through premiums.”

Now, he uses that example to show clients why options are useful. “Most of our clients are managed. But when we make mistakes, we explain what happened during annual reviews.”

For instance, when Coach’s stock fell, he told clients, “Listen, had we sold the stock, we would have been down 20%. But with the options strategy, we wrote and wrote call options, and managed to recoup the losses through premiums.”

Meanwhile, Wong also prefers to offer options strategies to his top-earning clients, which includes those who have $500,000-plus equity portfolios. To announce he can trade options, he’s mentioned he has his DMS certificate on LinkedIn, and always includes that information in client slideshows in case it piques interest.

And, he’ll help colleagues who want to understand derivatives. He uses the methodology he learned to provide informed opinions on markets. Colleagues, says Wong, have been appreciative while existing clients offered several referrals.

Options trading tips

Aristeo usually saves options strategies for clients with at least $1 million invested with him, and he prefers their total assets be at least $5 million. That’s because these strategies are tedious to implement since he has to evaluate which stocks in a client’s portfolio are worth writing against based on volatility and volume. Then, he has to write, trade and monitor options contracts.

Also, there’s a cost to trading options. “If I’m only writing two contracts, the revenue isn’t sufficient to cover that cost,” he says. He won’t write option strategies that are worth less than $30,000.

Because he only offers options to his wealthy clients, it only takes up about 5% of his time per week. He has a team that helps, consisting of him, his partner and an assistant.

The main benefit of options strategies is they help manage the risk and exposures of many of his clients’ portfolios, he says, especially when markets are choppy. Plus, investors can earn extra yield on more volatile holdings.

In order to use options effectively, Aristeo explains that “you have to write on companies that have larger beta and volume and, as a result, larger premiums.

“If I write on General Electric, I won’t have as large premiums because it’s not [a] volatile [stock]. But take Phillips Van Heusen—it’s a very volatile stock that we used to write against because it trades in a range. If [that stock] gets to the top of [its] range, we write a call.”

He adds, “If it gets to the bottom, we write a put, and we pick up yield on [those options] all day long. PVH has done nothing for two years, [but] we’ve picked up about $30 of premiums on it, which is about 15% annually.”

Aristeo expects more clients become familiar with the use of options strategies and ask to use them in their portfolios. So, he plans to bump up his fees in the next two to three years.

Currently, he charges 1% for regular management. “But if I add options management, it’s 1.25%.”

A look at options over the years

In Canada, there has always been a separate course and exam to get an options license, says Marshall Beyer, senior director of academic standards at CSI Global Education. In the U.S., options licensing is embedded in the Series 7 exam.

Here’s a breakdown of the development of options licensing standards in Canada.

Late 1990

Advisors take both the Derivatives Fundamentals Course and Options Licensing Course. Regulators decide that those getting options licensed should understand all derivatives products, including futures and OTC derivatives.

Pre-1999

Advisors take the Canadian Options Course, which only includes information on options regulations and trading.

Post-2008

Regulators and CSI aim to comply with general international standards for designations.

2010

CSI turns the DMS designation, which requires the basic courses and three additional electives, into a certificate. Unlike most designations, the DMS doesn’t require CE and work experience, as it falls into CSI’s advanced knowledge category.

2011

At the industry’s request, CSI integrates the two derivatives courses to create the Derivatives Fundamentals and Options Licensing Course. Still, a lot of people take the two-course route over taking the single course.

Katie Keir is assistant editor of Advisor Group.

Originally published in Advisor's Edge

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