Contrary to popular opinion, volatility isn't always a bad thing.
The market has bounced back 96% from the bottom of the financial crisis, but not without some “stomach-churning” volatility along the way, said Tom Bradley, president of TD Ameritrade Institutional.
During the most recent roller coaster ride, the S&P 5OO moved up or down more than 2% on more than half the trading days between July and November.
“At the end of the day, that volatility is actually a good thing,” Mr. Bradley said. “It creates opportunities. If everything's smooth sailing and the market's just going up, what does someone need an adviser for?” (Watch more with Tom Bradley on INTV from the 2012 TD Ameritrade Institutional Conference.)
One of the ways that advisers can take advantage of volatility is by using options strategies, such as covered call writings, Mr. Bradley said. TD Ameritrade Inc. acquired options trading platform thinkorswim in 2009.
Options trades at TD have grown 155% in the last two years, with the largest registered investment advisory firms being the most active users. More than half of RIAs with more than $1 billion in assets use options. About one out of five firms with less than $25 million in assets use options.
Advisers are using the synthetics to help protect against another 56% drop in the stock market and also to help generate income. “In this near-zero-rate environment, retirees are probably eating into their principle to get income," Mr. Bradley said. "That's probably not what's best for them."