Liontamer Soapbox

SUNDAY STAR TIMES ARTICLE

This week the Sunday Star Times featured an article written by Garry Sheeran "Return to options and futures sparks worries"

We pull up our soapbox - see below for Liontamer's reaction.

For those of you who missed the article, NZX recently announced that we will able to buy and sell options on a number of New Zealand's large listed companies in early 2004. The platform for this will be via the Sydney Futures Exchange and it should be possible to trade options on a few local shares and a NZ based index (liquidity is the factor which will determine this). Futures and options died a slow death through the 1990's, but NZX CEO Mark Weldon wants to reopen access to these instruments.

• Mark Weldon (NZX CEO): "These investments have proved very popular with retail investors globally because they allow investors to purchase large amounts of upside exposure for relatively little cost, and manageable downside"
• Philip Mathews (Association of Investment Advisers & Financial Planners CEO): "Share trading itself is a risky business and best left to professional investors" and "Options may be a way for professional fund managers to hedge their portfolios and reduce risk, but the advice for ordinary investors must be 'tread very carefully'."
• Colin Churchouse (MD of OMFinancial): "The vehicles could also find a place among knowledgeable retail investors" and "It's one way of enhancing profits and limiting profits at the same time"
• Eric Thompson (self employed options trader) "Option trading requires a mindset like an acquired taste. It takes a lot of time, practice and learning" and "Although professional investors could use option trading to protect portfolios, for the small investor it was basically trading, or speculating, not investing"

Liontamer Soapbox
So what do we think about it all? After all, we do have a business which specialises in putting together structured investments for retail investors - and behind the scenes, options are being used to create our products. The key point in this whole argument, involves defining your investor. To our mind, if you use the correct definition of a 'retail investor' then the trading of individual options contracts as a retail product is likely to end in tears. In the right hands and using the right strategy, options are actually a form of insurance, a hedge which can reduce risk. But very few retail investors will grasp how to put these strategies in place or how to overlay options on the assets in their portfolio to protect them.

Think of it like this - if you own a house, you pay a small premium and insure it. That's a safe and sensible thing to do. But if someone comes along and starts letting you buy and sell insurance without owning the house, it begins turning into a different animal. The money you would have used to buy the house is being used to buy and sell insurance on many hundreds and thousands of houses.

If we could limit the 'mums and dads' to using options in a way which protected their exposure we would have a controlled situation, but we can't. However that's no reason to be anti Mark Weldon's plans to re-introduce options trading. On the contrary, we need to welcome the move - there are always sophisticated and knowledgeable investors who will benefit and we need to encourage the New Zealand sharemarket to grow.

However, the correct route for true retail investors to benefit from capital protected sharemarket exposure is actually via packaged retail products such as those sold by Liontamer and other providers. The whole reason these products have had massive success overseas is because they take the complication out of derivatives. The 'mums and dads' don't have to buy or sell any options themselves. Instead they buy a very simple investment with predefined risk and returns. At no point to they need to trade or speculate.