ASX dispels myths on SMSFs, options trading

“Contrary to popular belief, SMSFs are definitely allowed to use options trading – just as long as they don’t put a charge against the fund’s assets”, he said

Mr O’Brien said a retail investor survey conducted by the ASX in April asked participants why they did not plan to engage in options trading, and 47 per cent said they needed more education.

Fourteen per cent said they thought options were too risky, and 13 per cent said it didn’t suit their portfolio strategy.

Typical investor comments also included: “SMSF funds do not allow options trading, as far as I was told”, and “As self-funded retirees, my wife and I have to live on our assets, and as such, gambling on options has little appeal”.

But rather than increasing risk, options can be used reduce the total risk of a client portfolio, said Mr O’Brien. In fact, they were created for that purpose, he added.

The basic single stock options are ‘calls’ and ‘puts’.

A call gives the holder the right, but not the obligation, to buy a stock at a certain price.

Conversely, a put gives the holder the right, but not the obligation, to sell a stock at a certain price.

A call amounts to an insurance policy against a stock going up in price, and a put insures against a stock falling in price.

There are four strategies that SMSFs can use when it comes to options, according to Mr O’Brien.

Trustees can buy calls, although they cannot simply be bought for leverage, he said.

SMSFs can also buy puts, which is a “perfect strategy” for trustees who want to protect their portfolios, Mr O’Brien explained.

“[SMSFs can] go and buy put options on their entire portfolio – if the market does fall then they’re protected against that,” he said.

Trustees can also sell calls, but only against stock they already own, said Mr O’Brien.

Finally, SMSFs can sell puts “as long as they’ve got the cash to cover their obligation to buy those shares if it were to be exercised”, he said.