David Siniapkin, a postal worker in York, Pa., uses some of the money in his IRA to trade options. Siniapkin, 46, says he tries to profit from strategies such as the "iron condor," which requires placing four different bets on the same security, risking $38 to make as much as $204 on one trade. It takes its name from a diagram, showing how it pays off, that resembles a bird with outstretched wings. After three years and being down as much as $10,000, he says he's broken even.
Siniapkin was one of about 100 people who attended an all-day training class in April provided by online options brokerage Thinkorswim Group, which TD Ameritrade (AMTD) acquired last year for $749 million. Participants sat in a Radisson hotel ballroom near Philadelphia and scribbled notes as Bob Groves, a former trader at the Chicago Board Options Exchange, waved a laser pointer at a projection screen to explain advanced trades.
Options are contracts that grant buyers the right, without the obligation, to buy or sell a security, a commodity, or an index's cash value at a set price by a specific date. Brokers must approve investors to trade options, says Gary Goldsholle, vice-president in the general counsel's office at Finra, the financial industry's self-regulatory body. Customers must provide details of their finances and trading experience, and sign a document saying they received a copy of "Characteristics and Risks of Standardized Options" from the Options Clearing Corp.
"Trading options is one of the all-time sucker's bets," says Whitney R. Tilson, founder of hedge fund T2 Partners. "Most experienced professionals lose money doing it. It's virtually certain that inexperienced, individual retail investors will lose money doing this."
The risks aren't scaring retail investors away. The volume of options trading in the U.S. tripled from 2004, to a record 3.61 billion contracts in 2009. Options trading by individuals in the same period has increased fivefold at Fidelity Investments. The number of contracts traded at Charles Schwab (SCHW), another firm that caters to small investors, rose 9 percent in 2009 from 2008.
Retail traders can access professional analytics and trading tools that "weren't even available to institutional investors five years ago," says Andy Nybo, head of derivatives research at Tabb Group. Some brokerages are encouraging options trading by charging commissions as low as 75 cents a contract and providing training sessions. E*Trade Financial (ETFC) saw a 600 percent increase in attendance at training events last year, the company says. The cost of the courses ranges from free to thousands of dollars. Thinkorswim's session in April was free; participants were later pitched additional training and online tools, which run from $299 to more than $2,000.
Thinkorswim's founder, Tom Sosnoff, objects to the idea that complex options strategies are too dangerous for individuals. "I'm not a fan of people who say you shouldn't be doing this," he says. "Imagine you walked into the casino and people said to you, 'You look stupid, so you can only play the slots.' "
For some investors, the results resemble a trip to the casino. "My first couple of trades I did very, very well, and I got a little bigheaded and very, very greedy," says John Mahoney, 49, an engineer. "I lost about $20,000 initially." Mahoney still trades; he says he made $4,000 one week in April. Karen Fitchett, 64, a real estate investor, says she has lost tens of thousands of dollars trading options since 2007, which is why she still attends classes. "It's become like an intellectual affair," she says. "I just became seduced."
The bottom line: Using options is another way investors try to outsmart the market, and they can also be a quick way to lose money.