More SMSFs use CFDs for protection
More self-managed super fund (SMSF) trustees are using the power of CFDs as insurance within their SMSF to protect their core portfolios, according to Ashley Jessen, head sales trader for Capital CFDs.
The strategy has been particularly useful after years of uncertainty and extreme volatility in local and world markets, he said.
"If a SMSF holds 5,500 Fortescue Metals (FMG) shares then an options strategy would require 55 separate options contracts to be written (options over Australian shares are written in 100-share contracts)," Jessen said.
"Whereas, a single CFD trade could protect the FMG shares on the downside, which is essential during market downturns such as recently when FMG fell just over 31 per cent since the start of April.
"Instead of being exposed to a 31 per cent drop in FMG, an SMSF investor positioned via such an 'insurance policy' could have positioned themselves to limit that downside for minimal outlay, as CFDs normally only require around a 5 per cent deposit to control the full face value," Jessen said.
For Jessen, though most CFD providers did not recommend that SMSF trustees use their portfolio for principal trading or speculation via derivatives, such a strategy explained the growth of CFD trading within SMSFs as those trustees looking to protect the value of their core portfolio did so by 'shorting' their portfolio in case of a market slide.
"Experienced investors who understand leverage and who are looking to use CFDs for risk protection are well advised to consider this technique further," he said.
"Eurozone announcements that spook investors and drive markets down are all too common nowadays, so investors need to consider all the tools available to limit their downside and lock in profits."
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