Futures: Liffe tempts Aunt Agatha with options

JUST say the word 'options' and you are likely to receive a blank stare, a diatribe on the evils of financial speculation, or the story of the worm farmer who lost pounds 2m trading options in 1987.

These financial contracts give the holder the right to buy or sell a specific quantity of an underlying financial instrument at a fixed price, on or before a given date.

In the UK, options are traded on the London International Financial Futures and Options Exchange (Liffe) and on three commodities exchanges.

But they have never really caught on here, especially among ordinary folk. Liffe is trying to change that by encouraging the public to have a go and trying to get professional money managers more interested.

The exchange, an arena of traders in brightly coloured jackets waving arms and shouting wildly, will be trying to tempt Aunt Agatha into delights she has long been warned against. What will she make of it?

In the United States, the Netherlands and Sweden, options are widely accepted by the public as a way to speculate cheaply in shares, commodities, or bonds. In some countries, private investors account for up to 70 per cent of options volumes. In Germany and the Netherlands, the big banks offer options trading in high street branches.

Pension funds, insurance companies, and big corporations use options with confidence to diversify their investment portfolios, or as insurance against a fall in the price of a share.

People in Chicago tell tales of engineers and businessmen financing trips to Hawaii and extensions on their houses with their winnings from the Chicago Board Options Exchange.

But other dabblers have lost a lot of money. Anyone who claims options are not risky naively assumes that punters all do their homework before investing, and then take the safest course. But in reality most people do not read the small print.

Options experts say that amateurs should only ever buy options. The price you will be asked to pay upfront is the total you will have to spend.

Under no circumstances should novices get involved in selling options. If the market moves against them, the losses can be unlimited.

Roger Barton, director of business development at Liffe, said: 'There is active misunderstanding about options - their image is that they are a highly leveraged, casino type of thing.'

But at the retail level, using options for limited-risk speculation is perfectly valid, he said.

The reasons that options have not been popular in Britain go back to the origins of the London Traded Options Exchange, which started as an arm of the Stock Exchange specialising in options on individual shares.

Always the Stock Exchange's poor relation, LTOM's contracts were never properly promoted or developed, yet they had to abide by the Stock Exchange's clubby City rules. They were understood and used by a small elite, and volumes were low in most contracts.

Cultural factors and a prohibitive tax and regulatory environment also stunted their growth when other options exchanges grew. Americans observe that the British educational system, which sends a minority of school leavers to university, means that relatively few people in the UK will have heard of options or understand how they work.

Liffe took over LTOM a year ago, overcoming a last-minute controversy among options-trading firms over the move. The exchanges hoped the lively atmosphere of the combined trading floors would encourage business in the 60 or so stock options.

But executives at Liffe, now the third largest exchange in the world, were dismayed that the equity options' performance remained sluggish for most of the year after the merger. Their volumes were down 4 per cent in 1992 from 1991, while the popular FT-SE 100 index options volumes rose 37 per cent.

Last week Liffe announced that it was giving the options complex a facelift. The exchange is dropping four moribund stock options - Eurotunnel, GKN, Scottish & Newcastle and Vaal Reefs Exploration & Mining - and adding eight new ones in May.

A new equity products director has been hired - Karin Forseke, who helped to establish OM London - to run an education and promotion campaign. User-friendly changes to the market's structure are coming in, tax and regulations have been eased. In the first quarter of 1993, stock options turnover rose 9 per cent.

This year Liffe's stock options prices were listed on Ceefax, the on- screen information service, prompting more than 1,000 inquiries. Liffe was pleased by a newspaper article extolling the virtues of options and featuring a man who made a lot of money trading them. However, it was worried by the hundreds of readers who phoned Liffe in response to the article, fearing that in the rush to get a piece of the action, the ill-informed could get burnt.

Despite the interest, Liffe faces obstacles in widening its customer base, not least from its own members. At least one big stockbroker active in options is quitting the private client options business.

An executive said: 'The margin (deposit) shortfalls against positions creep up more regularly with private customers and there is more risk for us.' In other words, most private clients lose money.

It is wise for Liffe to try to revive its options complex because there is room to grow, but even wiser if it can manage it cautiously. It is well aware that teaching people how not to lose money on complex financial instruments takes years, not months. If an innocent who loses heavily in options hits the headlines, it could set the exchange's reputation back a year. And the regulators are always watching to protect Aunt Agatha's life savings.

For information on trading options and a list of brokers, call Liffe on 071-623 0444.