Keep your options open

Nick Leeson has probably done for derivatives what Robert Maxwell did for occupational pension schemes.

At a conservative £850m, the sheer scale of his losses in the Barings disaster will have convinced even the most adventurous private investor that any financial product in this category belongs firmly in George Soros's school of investment strategy rather than a sensible portfolio.

That Mr Leeson bet Britain's oldest merchant bank on futures contracts matters not a jot. All derivatives have again been tarred with the same brush.

Like other high-profile derivative disasters, the publicity has fuelled two common misconceptions about them. The first is that anything labeled a derivative is too complicated for private investors. The second is that you need large sums of money to get in on the action.

The truth is that anyone with a spare £200 or £300 to play with can deal in options. These derivatives are as old as the hills and are often used by more sophisticated private investor. Far from being a dangerous gamble, they are used to manage risk and also to generate extra income on a shareholding. When the market is expected to remain flat, share performance can be enhanced by using options.

Options can be traded independently of the underlying shares to take a view on the market. And unlike the underlying shares, options allow an investor to profit from price falls as well as price rises.

The London International Financial Futures and Options Exchange lists 11 member stockbroking firms prepared to deal in options for private clients. Albert E Sharp, has 180 private clients registered to deal. "They tend to be people who already have a full range of the usual investments,'' said Carl Beckley, associate director, derivatives.

Options are available on a wide range of products including individual shares - equity options - and stock market indices, or index options. By giving the investor the right to buy or sell shares for a fraction of the price of the underlying shares, options offer varied investment strategies from pure speculation to insuring a portfolio's value.

Very simply, options give the holder the right to buy or sell a product at a fixed price within a set time limit. But, unlike Mr Leeson's notorious futures contracts, there is no obligation to buy or sell.

Equity options, normally traded on Liffe in contracts representing 1,000 shares, come in two types. A "call'' option allows the holder to buy shares at a fixed price. A "put'' gives the right to sell at a fixed price. Liffe trades options on the shares of about 70 British companies.

An investor expecting Hanson shares to rise above their current price of 236p could buy 1,000 Hanson shares costing £2,360. Alternatively, the investor could buy a November 24 call option for 15p.a share. The contract for 1,000 shares would cost £150 and give the investor the right to buy 1,000 Hanson shares at 240p until expiry date on 15 November.

If, as the investor expects, Hanson's share price rises to say 280p then the call option will also rise, largely reflecting the 40p premium. It may rise to say 45p a share, giving the investor a profit of £300 on the £150 outlay, a return of 200 per cent. The percentage return on the underlying shares would have been considerably less at 18.6 per cent

Investors can also profit from an expected share price fall by purchasing put options which can be used to protect the value of share holdings from expected falls by matching the underlying holding with the required number of options.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
filmPoldark production team claims innocence of viewers' ab frenzy
Life and Style
Google marks the 81st anniversary of the Loch Ness Monster's most famous photograph
techIt's the 81st anniversary of THAT iconic photograph
News
Katie Hopkins makes a living out of courting controversy
people
News
General Election
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Guru Careers: Pricing Analyst

£30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Sales Team Leader - Wakefield, West Yorkshire

£21000 - £24000 per annum: Ashdown Group: The Ashdown Group has been engaged b...

Ashdown Group: Head of Client Services - City of London, Old Street

£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

Revealed: Why Mohammed Emwazi chose the 'safe option' of fighting for Isis, rather than following his friends to al-Shabaab in Somalia

Why Mohammed Emwazi chose Isis

His friends were betrayed and killed by al-Shabaab
'The solution can never be to impassively watch on while desperate people drown'
An open letter to David Cameron: Building fortress Europe has had deadly results

Open letter to David Cameron

Building the walls of fortress Europe has had deadly results
Tory candidates' tweets not as 'spontaneous' as they seem - you don't say!

You don't say!

Tory candidates' election tweets not as 'spontaneous' as they appear
Mubi: Netflix for people who want to stop just watching trash

So what is Mubi?

Netflix for people who want to stop just watching trash all the time
The impossible job: how to follow Kevin Spacey?

The hardest job in theatre?

How to follow Kevin Spacey
Armenian genocide: To continue to deny the truth of this mass human cruelty is close to a criminal lie

Armenian genocide and the 'good Turks'

To continue to deny the truth of this mass human cruelty is close to a criminal lie
Lou Reed: The truth about the singer's upbringing beyond the biographers' and memoirists' myths

'Lou needed care, but what he got was ECT'

The truth about the singer's upbringing beyond
Migrant boat disaster: This human tragedy has been brewing for four years and EU states can't say they were not warned

This human tragedy has been brewing for years

EU states can't say they were not warned
Women's sportswear: From tackling a marathon to a jog in the park, the right kit can help

Women's sportswear

From tackling a marathon to a jog in the park, the right kit can help
Hillary Clinton's outfits will be as important as her policies in her presidential bid

Clinton's clothes

Like it or not, her outfits will be as important as her policies
NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders