If we’re being encouraged to own shares, we must also learn how to hedge them

As well as modelling and teaching surfers how to fend off sharks (tickle their branchial grooves), one of the other ways I’ve paid the rent since losing my banking job is by hosting writing workshops.

I hope they’re free, I hear you cry! Yes, very funny. Anyway, the key to persuasive writing, I teach my students, is to put readers into what behavioural scientists call a state of “cognitive ease”. Once lulled, humans pretty much believe anything.

Numerous studies have also shown that readers who are at ease are less prone to pick up errors or find faults. For example, students score better in maths tests when the ink is a harder-to-read grey rather than black, simply because they are more agitated and therefore alert.

This explains why so few of us (myself being the number one culprit) picked up the typo in my penultimate paragraph last week when I wrote “call” instead of “put” option. Huge thanks to those of you who emailed to point this out.

So to be clear, if you want to make squillions from a stock market crash, you need to buy deep out-of-the-money put options. This is basically what Michael Burry, the hedge fund manager, did with mortgage-backed securities pre-financial crisis, immortalised in the film The Big Short.

Apologies for any confusion. By way of thanks, I’ve finally decided the simplest way to give you the stock valuation tool I’ve been promising you for months is to host it on a Google Drive here. You can also find it on my LinkedIn page.

If it makes you feel any better, I’ve been totally confused myself this week, researching how to incorporate options trading into my portfolio. As I mentioned in my previous column, my current platform doesn’t offer much in this regard. That’s the same for most of you, I suspect.

What are retail investors to do? Well, for starters, I’m not being fair. My online broker offers two dozen products labelled “collateralised exchange traded securities”. These use options to generate income from a stock or index, while also giving some exposure to any future upside. But I don’t want that. I want protection from a crash.

Some online platforms here in the UK — Interactive Brokers, say — allow the trading of options on single stocks, indices and several pound-denominated ETFs. But mostly it’s a restricted list versus the full suite of options available on ICE, Cboe, Euronext, LSE and Eurex.

Why that is I’m not exactly sure. Perhaps the feeling is that retail investors only want options on the most prominent stocks, as well as the major exchanges and ETFs. And no doubt the financial crisis has scared some people off derivatives forever.

It must also be true, in the UK at least, that the popularity of financial spread betting and contracts for difference has lured away some of the natural customers for options. These don’t do everything options can, but you can leverage yourself silly and there are considerable tax advantages.

Financial spread betting — as with sport — is considered gambling and hence there is no stamp duty or capital gains tax. CFDs are also exempt from stamp duty because there is no transfer of legal title in the underlying asset.

That said, options have the advantage of being cleared through central clearing houses, thereby guaranteeing settlement. Exchange pricing is also public with live bid offer spreads. Costs and legal protection are more transparent too.

It’s odd then, that derivatives such as futures and options are seen as suitable for professional investors, whereas spread betting and CFDs are considered more retail. Indeed, you could argue that given the cheapness of buying downside protection, a wider use and understanding of options should be encouraged. Hello, Rachel Reeves!

All these products require suitability checks anyway — damn right when leverage is involved. But for anything slightly complicated, perhaps the best approach for retail investors is old-school broking, where you ring up someone in a bowler hat who listens to what you’re trying to achieve and helps you execute.

Such brokers still exist — OptionsDesk in the UK, for example. And it is even possible to link an account to a self-invested personal pension with all the tax advantages that entails. You probably need north of £50,000 to play, but I for one would value someone double checking my trades.

Alternatively, after their success in the US, so-called “defined outcome ETFs” are heading our way. Similar to the collateralised ETPs mentioned above, options are used to provide a whole host of pre-determined returns over a specific time period. Typically, they offer downside protection in exchange for capping the upside.

Sometimes also known as “buffer funds”, one of these has been launched in Europe this month by BlackRock for large-cap US equities via the S&P 500. Given all the talk of bubbles, this shouldn’t be a surprise — and I would expect many more of these in future.

Meanwhile, Cboe Europe Derivatives has announced the introduction of what they call “Flex options” in Europe early next year — again having been successful across the pond. These allow you to tweak contract terms such as expiration date and strike price. The plan is to offer this customisation on an increasingly wide range of stocks, indices and ETFs.

All good stuff, in my opinion. The reality is that there will soon be few excuses for retail investors not only to survive a market crash in the future, but maybe to profit from one as well. Frankly, it would be plain stupid for the UK chancellor to promote share ownership without encouraging innovation and access in this area too.

As for me, I would also like to fight back against the Ozempic and Mounjaro-led attack on the business lunch. Time to find me an options broker and pencil in a regular monthly “review”.

The author is a former portfolio manager. Email: [email protected]; X: @stuartkirk__