Derivatives
Many investors are not using options to enhance and protect their portfolios.
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Strathmore specialises in the derivatives market, particularly in Exchange Traded Options (ETO’s). Our strategies and execution services cater for both regular options traders and portfolios. We employ a clear risk/reward matrix before placing any options trades.
Options are an invaluable tool to enhance and protect portfolios, but they must be executed correctly. Strathmore’s advisers have decades of experience using options to boost yield, enhance downside protection during market uncertainty and as a low-cost, low-risk means of speculating on market movements.
Strathmore offers the ability to build options positions using Tailor Made Combinations (TMC) which allows up to four legs to be combined into a single trade.
Find out more by speaking to an adviserWhen an investor wants to place an options trade, their Strathmore adviser will complete its proprietary risk/reward matrix. This matrix details maximum loss versus maximum profit. Further, each trade comes with a limit price and full margin transparency before placing an order. With this matrix, you get full awareness of your exposure before a strategy is executed.
Buying put options can be used to protect a portfolio. A put option will increase in value when the underling asset decreases in value, providing insurance against unexpected turbulence.
Options contracts can be bought or sold at any time without ever having to exercise the contract. This allows the investor to trade in and out of a position depending on their view of the market, so providing a means of taking profit or limiting losses.
Additional income can be generated by selling options on shares that are already owned. Generally known as a covered call strategy, it can be used to either supplement dividend income or as a trading strategy.
Using options, an investor can expend a small amount of capital and gain a much larger exposure to a desired position. So, the leverage provided by options can magnify returns significantly, allowing an investor to benefit fully from movements in an instrument without having to pay the full price for owning it
The team uses three key options strategies as part of its derivatives services: covered calls, sold puts, and directional trading.
Covered calls: For investors with a blue-chip portfolio, a covered call strategy can provide additional returns and increase yield through the receipt of a covered call premium. A useful tool for income-focused investors, covered calls can be used to take advantage of neutral to slightly bullish sentiment. This strategy can generate income even when a company’s stock price remains unchanged.
Sold puts into buy/write (covered calls): In a neutral to bullish market, selling put options below the underlying stock price (out-of-the-money) of blue-chip stocks reduces the entry price. If the stock remains above the strike price, this can also produce income. By entering this strategy an investor would be prepared to purchase the underlying stock at the strike price on expiry. This strategy can then be rolled into a covered call strategy to generate further income.
Directional trading strategy: Through the short-term trading of Exchange Traded Options (ETOs), the objective of the directional trading strategy is to take advantage of market volatility. Using an active trading approach, directional trading can be used on the S&P/ASX200 index or individual securities on the S&P/ASX50 index. Under this strategy, your adviser will aim to receive approximately two-thirds of the premium from the spread sold, risking approximately one-third on each trade. Strathmore’s directional trading strategies also include bought calls and spreads. With daily order management, our advisers can help you get a better price when exiting positions.
For investors who frequently trade options, our execution service provides the following:
Best execution
Use of TMC’s
Stress testing and margin requirements
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As with any financial product, there are risks in trading options. It is important to understand the product and the risk/reward ratio involved, prior to placing any trade. Certain option strategies carry a risk of losses that can exceed the value of the initial investment.
The options market can be complicated. It is not as simple as buying a position in the belief that it will rise in value. Trading options requires an investor to factor in when and how much an underlying asset will move. It is always important to consult an accredited derivatives adviser prior to placing a trade.
Time value can represent a significant component of an option's price. As an option draws closer to its expiration date, time value continues to diminish. Time value is also affected by expected volatility. If volatility rises, time value rises. If volatility falls, time value falls. These are all important considerations for investors trading in options.
Further information on the risks of trading options can be found in the ASX – Understanding options booklet, which is freely available on the ASX website.
Wholesale investors (also known as sophisticated or 708) can access investments not available to retail investors, such as secondary placements in ASX-listed companies, pre-IPOs and other capital raisings.
A wholesale investor is defined by the Corporations Act 2001 (Cth) as a person or entity that has obtained a qualified accountant’s certificate stating that they have either/or: