ASX aims to demystify equity options

Published in the Daily Telegraph, May 2014 by Dale Gillham

Equity options have long been used by investors to generate income and provide a way of insuring a portfolio against market falls.

But many still don’t use them, which begs the question—why is this excellent vehicle being ignored by so many when the potential is there to generate 2.0 per cent per month in extra income?

ASX equity options are contracts giving you the right to buy or sell a particular security at a price at some point in the future, at a fraction of the cost of the physical shares.

So if you believe the market is likely to move in a particular direction over a particular period this can be a very powerful tool to improve your returns.

The issue with options not being used by ordinary Australians comes down to a lack of understanding, and the need for the ASX to educate people about the benefits in using options to create income and protect a portfolio.

However,the difficulty in getting the masses interested comes from the widely held belief that the market does not offer sufficient volumes or a range of prices.

More volume means better liquidity and better liquidity means lower risk for anyone using options as an investment tool. 

The GFC saw the value of equity options traded fall to around one quarter of pre-GFC levels, and since then while activity has improved it has failed to fully recover.

Speaking with Graham O’Brien, manager, equity derivative sales at the ASX, he informed me that a lot has been done over recent years to lay a foundation for creating a better market for investors. 

The first step was to make options more accessible to investors and self managed superfunds by bringing contract sizes into line with international markets.

This included reducing the size of each option contract from representing 1000 shares to 100, which means that options are now much easier for ordinary investors to get into.

Graham also advised that in June ASX will launch a national educational campaign which aims to demystify options and demonstrate the benefits to retail investors.