How to widen investment options

IN THE wake of the Barings dbcle, the suggestion that derivatives are a useful tool for the private investor is likely to raise more than a few eyebrows.

Nevertheless, the London International Financial Futures and Options Exchange (Liffe) and ProShare, the organisation with the mission of wider share ownership, are both promoting equity and index options to a wider audience.

Karin Forseke, Liffe's director of equity products, is well aware of the widely held view that equity options are a new invention and too complex for the private investor. She dismisses what she refers to as the first popular misconception with the fact that equity options have been traded in London since 1978 - four years before IBM introduced its first office PC.

Whereas the PC is now regarded as essential equipment in the office and in many homes, many private investors shun options due to lack of understanding of the product. With a suitable education programme, however, Liffe aims to enable individuals to benefit from using options in the same way as professionals do.

Liffe certainly looks with a tinge of jealousy at Chicago and Amsterdam, the only two option exchanges that are larger than London's. While private client use of equity options is a relatively low 20 per cent in the UK, it is between 50 and 70 per cent in Chicago and Amsterdam.

Equity options may not be for the "Sids" of British Gas share fame. Nevertheless, they can be a useful tool for a sophisticated private investor with the time and inclination to learn about their use. Here is our beginner's guide.

What is an equity option? It is an instrument that gives the holder the right, but not the obligation, to buy (or sell) a set number of shares at a fixed price, within a pre-determined period of time.

But surely they are risky? The buying of options involves a limited risk. The maximum possible loss is the price paid when entering into the contract. For example, suppose shares in ABC plc currently stand at 200p. An investor who believes the shares will rise may be willing to pay 20p for the right to purchase additional shares at 200p in six months' time. If at the end of six months the shares are below 200p, then his loss has been the cost of the option. An option contract is usually for 1,000 shares.

The unlimited risk that many people seem to associate with options is certainly possible. However, this can only come about through the uncovered - or naked - writing of options. This strategy is most definitely not recommended. Naked writing means assuming an obligation to buy or sell shares at a fixed price. If one does not have the shares, or the cash, to meet this obligation, the outcome may be disastrous.

But how can I use options to protect my existing holdings? Suppose you have to raise a certain sum in six months' time. You plan to sell a certain number of shares. You could protect yourself against a fall in price by buying an option to sell a number of the shares at a given price so that you will realise the sum required even if the share price falls.

Liffe produces a private investor pack, introducing equity and index options, and a list of brokers. Contact Kristy Grant, Liffe, Cannon Bridge, London EC4R 3XX. Tel: 0171-379-2421.

Kenny Ireland, pictured in 2010.
peopleActor, from House of Cards and Benidorm, was 68
A scene from the video shows students mock rioting
newsEnd-of-year leaver's YouTube film features staging of a playground gun massacre
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
i100This Instagram photo does not prove Russian army is in Ukraine
Arts and Entertainment
The cast of The Big Bang Theory in a still from the show
tvBig Bang Theory filming delayed by contract dispute over actors' pay
Morrissey pictured in 2013
Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
ebookA unique anthology of reporting and analysis of a crucial period of history
Tyred out: should fair weather cyclists have a separate slow lane?
environmentFormer Labour minister demands 'pootling lanes' for women cyclists
England celebrate a wicket for Moeen Ali
sportMoeen Ali stars with five wickets as Cook's men level India series
Field of broken dreams: Andy Bell visits Passchendaele
news5 News's Andy Bell visited the killing fields of the Great War, and his ancestor - known only from his compelling war diary - came to life
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

1st Line Support Technician / Application Support

£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

Team Secretary - (Client Development/Sales Team) - Wimbledon

£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

Accountant / Assistant Management Accountant

Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Day In a Page

Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In my grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices
Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

Could smartphones soon be diagnosing diseases?

Health Kit and Google Fit have been described as "the beginning of a health revolution"
Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

Can we learn to love Ryanair again?

Four recent travellers give their verdicts on the carrier's improved customer service
Billionaire founder of Spanx launches range of jeans that offers

Spanx launches range of jeans

The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
10 best over-ear headphones

Aural pleasure: 10 best over-ear headphones

Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel