Derivatives


An investor wishing to hedge their portfolio, enhance their income or merely speculate may wish to consider Traded Options, Covered Warrants or Contracts for Differences (CFDs). Their advantage lies in the diversity of ways in which they can be employed to accomplish specific objectives. We have qualified stockbrokers who can guide you through these complex investments.


i-Traded Options (UK, European & US markets)

Options can be used to enhance the income of a portfolio. This is accomplished by writing covered call options as well as put options. Writing call options is opening a position, for which you are obliged to deliver stock to the holder should the share price rise above the strike price. As a writer of a call, you will be required to have the stock to cover the position, should the holder exercise the option against you. Writing put options is opening a position, for which you are obliged to purchase stock from the holder should the share price fall below the strike price. As a writer of a put, you will be required to have the cash to cover the position. By selling puts below the market price and calls above the market price (a strategy known as a "strangle"), it is possible to profit from sideways moving markets. Investors can also use options to protect holdings or to buy or sell shares at more favourable prices.


ii-Covered Warrants

A Covered Warrant is a financial product that facilitates speculation in an underlying security such as a stock, index or commodity etc. They give the holder the right (but not the obligation) to buy or sell an underlying asset at a predetermined price on or before a certain date in the future.


iii-Contracts for Differences (CFDs)

A CFD is an agreement to exchange the difference in value of a particular security between the time at which the contract is opened and the time at which it is closed, without the requirement to own the physical asset. CFDs are traded on margin, so you can take a position without having to pay the full value of the transaction. The benefit of this is that any profits you make are larger; the risk is that if your positions move against you your losses will be magnified and you may need to deposit more funds to maintain your positions. This is because you must meet the full value of running losses as well as maintaining the initial margin. By using margin you are effectively borrowing money to trade, and as a result you are charged financing on long positions but receive interest on short positions. Advantages of CFDs over traditional share dealing include:

  • Low commission rates, as no settlement of stock takes place.
  • Low margin requirements.
  • No stamp duty.
  • The ability to go short i.e. profit from falling as well as rising markets.
  • Enhanced risk protection through the use of stop loss orders.


iv-Listed Contracts for Differences

Listed CFDs are similar to CFDs but are traded on the London Stock Exchange and strictly limit the maximum loss possible through an in-built guaranteed stop loss.