Options can add extra dimension to financial advice

Exchange traded options are a powerful tool in managing a portfolio but the value they can unlock remains underutilised by advisers – both experienced advisers who are familiar with financial markets, and newer planners who are getting up to speed.

“Options often get tarred with a broad brush – the thought can be: “derivatives are just a tool providing leveraged directional exposure and I don't want my client to be involved in that,” says Lewis Taie, Senior Manager, Derivatives Program, at AUSIEX.

“There are misconceptions about how options can be used – it’s not simply a punter’s tool to either win a lot or lose a lot,” Taie says.

Options can actually be used in any number of ways, including very conservative strategies that aim to shield capital from market volatility. For example, a retired director may have a significant parcel of company shares and want to protect its value. This could simply involve buying put options to reduce the risk of loss.

Or a well-off client in their mid-40s may have a higher-than-average risk appetite and be comfortable with a far more active options strategy, whereas others may simply sell calls to boost income from a share portfolio.

Dual benefits

Perth-based Private Wealth Adviser Scott Metcalf, from Euroz Hartleys, has used options in client portfolios for two decades, using strategies to better manage portfolio risk and provide additional income to supplement the client returns.

“I use a combination of covered calls on existing blue chip holdings, bought puts to hedge an individual position and also sell both puts and calls on the index,” Metcalf says.

He is conscious not just that the additional performance is always welcomed by clients – but also that the more frequent client communication required for options strategies has allowed him to foster stronger relationships with some clients.

The Stockbrokers and Investment Advisers Association (SIAA) in conjunction with the ASX provides scholarships for advisers to undertake the necessary training to become an accredited derivatives adviser. AUSIEX can help facilitate these scholarships, which are completed through the SIAA. 

The scholarships apply to either course, Accredited Derivatives Adviser Level 1 or Accredited Derivatives Adviser Level 2. This training is not compulsory to provide options advice, but it is industry standard that Australian financial services licence (AFSL) holders require their advisers to obtain these accreditations and have the relevant experience to provide derivatives advice.

Beyond education, Taie says there are four other important considerations for advisers who want to add options to portfolios. 

The first consideration is whether advisers have the tools to effectively communicate with clients about the nature of an options strategy and the potential outcomes – both the potential upsides and downsides.

“The aim should be that when the position has expired, that the client is very well aware of why it’s moved in their favour or not,” says Taie.

“AUSIEX can provide advisers guidance on how to frame those conversations with clients when deploying different strategies before the trade occurs to ensure the client understands the possible outcomes, along with the personal support it provides in relation to other aspects of options trading,” Taie says.

Technology considerations

The second consideration is the technology required to trade effectively, including risk management systems that provide advisers with a clear view of client positions that may require their attention at a specific point in time.

The third consideration is the capital position of a broker: “you want your broker to have a strong capital position,” Taie says.

The smaller the capital position of the broker, the less headroom for growth there ultimately will be for its client base and by extension the individual adviser themselves. Ultimately, this means they will need to reduce the amount of trading they conduct for clients – and that will have a potential impact on their clients’ strategies.

Another consideration when choosing an appropriate broker is whether it has experienced staff who have completed the above training themselves. They should also have the necessary experience to answer any queries from advisers – particularly in volatile markets.

AUSIEX offers options trading as a complement to its equities solution or on a standalone basis for advisers who prefer it to manage their equities elsewhere. 

To apply for a scholarship to become an accredited derivatives adviser, speak to your AUSIEX relationship manager.