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Three popular strategies for trading stock options
With the outlook for the US economy starting to look positive, I’m a little more optimistic than most about the direction for our share market. That said, it’s hard to see a big rally until the “Euromess” shows signs of being under control, and in these challenging times, exchange-traded options could have a role to play in your self-managed super fund – either to boost returns, or allow you to sit out and wait until confidence returns.
Before you consider trading options, you will need to do two things:
Make sure that your SMSF’s written investment strategy allows you to trade options, and if not, modify it and then authorise via a Trustee Resolution. The investment strategy should briefly substantiate how the use of options will help enhance or protect your portfolio’s returns.
If you haven’t got an options account with a broker, you will need to open one. Most advisory and online brokers such as CommSec offer these services, and as there is not quite as much competition here on brokerage rates, it may pay to shop around.
So, to the strategies. Let’s look at three popular ones (there are scores of them): the ‘long call and cash’, the ‘protected put plus stock’, and the ‘covered call’ or ‘buy and write’.
Long call and cash
This is probably the most popular strategy for long-term share holders such as SMSFs because it can be used to enhance the income return on your portfolio and is particularly suitable to a range-bound market. Some insulation against a rising market can be achieved by selling out-of-the-money strikes – although this obviously reduces the income return.