Hi @Mallers , I meant to reply to your post on options at the time but got distracted and am getting back to it (I hope you had a good Xmas). I have used options on and off for a long time, first time about 25-30 years ago. I am an enthusiastic amateur, not a professional or expert – so happy to learn more also and share what I have learned, but verify independently.

I don’t use an SMSF or know the rules, but it sounds like the advice you have says you can use “Covered Calls” which is an option strategy where you own the shares and sell call options over the ones you own. The aim being to earn the premium and juice up the yield.

The strike price is usually set 5-10% above the current price at a price you are comfortable selling at if the price goes up. You are betting on volatility, hoping for low volatility while the buyer of the option is hoping for high volatility.

I have used Covered Calls a few times but it never really fitted with my investing style, I want to be exposed to upside surprises/irrationality, not miss it because of an extra 5% yield. It can also lead you into capital losses where you replace a call that has just expired after a price drop and the exercise price you have to offer is below your buy price (so you can still make a loss).

As with most things with options, it sounds good and works in certain circumstances but can come undone as an ongoing strategy when the market suddenly decides to change behavior. MF in the US had and may still have a service that employs this strategy, it is very appealing to investors looking for yield, especially in the US where dividend yields are much lower than in Australia, also the US option market is massive and liquid unlike here.

If you are going to do anything with options, I would strongly recommend you learn how to calculate the value of an option using the Black Scholes method. Also understand how volatility is measured using the model and how time decay works. Just Google Black Scholes to learn about it and there are a lot of free calculators or spreadsheets online you can use.

Note, I say learn this model not to know the “correct price” for an option, rather to understand how the market will price an option and to understand how the price changes based on the different variables. Just like investing in companies, the only way you beat the market is by taking a contrarian position – ie you disagree with the “correct price” which in the zero sum game of the options market it is even more important than for the positive sum share market.

I would also flag that you should never “sell” an option outside of the above covered call strategy unless you know options very well and what you are doing because, in the case of selling call options you can expose yourself to unlimited losses (like shorting). Selling put options is very risky also but at least your losses are limited.

The place I have found the most success in using options is when I have a strong fundamental reason for a significant price movement and buy an option that is dated at least twice the time period you expect the price action. Things always take longer than you think, so 1 year + is the time frame I have gravitated to through experience. The investment thesis is that I am willing to risk 5-10% of the value of the stock for a 1 year opportunity to participate in a large price movement. Call options are usually better at this (things trend up and the gain is unlimited), put options, like shorting stocks is a hard and the gains limited.

The caveat with buying options is that you have to be able to accept a total loss of the premium you paid. It is likely that most of the options you buy will expire worthlessly, you are hoping to make many multiples on the ones that succeed to cover these losses. Example, in the last 7 years I have had 44 long option positions (ie buy options), only 18 (40.9%) were profitable with 23 of the 26 losses being total losses. Despite this I made a 22% return on the amount invested with most of the return down to a hand full of positions.

Rolling options is a tactic used to minimise losses by holding the option for as long as the time decay on the value is small, eg buy a 3 month option and sell after 1 month and buy another 3 month option for the same or a moving strike price (understand time decay to make sense of this)… sorry to much detail – there are books you can read on options strategies if you really want to get into it.

The point I was going to make is that options only make a very small part of my portfolio at any point due to the high probability of total loss (well under 5%). I find them good for scratching an itch on an investment idea where I don’t want to commit a full position worth of capital (5%) either for the risk to the downside or I just don’t have the amount needed at that moment.

Well this post is far to long already, so I will stop here and look forward to discussing other options matters in other posts.

@Mallers @Tom73 Tom has covered options trading strategies well. I have in the past sold put options in our SMSF covered by invested cash. The cash needs to be available on the option expiry/exercise date. I have done quite well selling put options on blue chip companies (companies I would like to have in our portfolio). I used European options because they can only be exercised on the expiry date. No nasty surprises ahead of the expiry date, and I would often choose an expiry date in the month prior to going ex-dividend. I would mostly select an option series with a strike price below the current share price and generally 6-12 months out. I would often let the option expire and take the stock if exercised. I would sometimes roll the expiring option over into a new option. If this is done concurrently (Buy back and sell another put option at the same time) it is referred to as a “combination”. It’s risky because you don’t know whether you will be exercised or not until the expiry date, and then you need to be ready to act immediately. The attraction, if exercised, is the premium you receive when you sell the option effectively makes the shares cheaper than what you were prepared to pay several months earlier, and you receive the dividend soon after being exercised. If not exercised you keep the premium, then rinse and repeat! It’s an OK strategy if you like the underlying companies you write the options on.

I like to keep things less complicated now. No more options trading for me!

According to ChatGPT research, you can still sell put options in an SMSF providing strict conditions are met.

ChatGPT Answer:

Yes — an SMSF can sell (write) put options, but only under strict conditions set by superannuation law and the fund’s trust deed.

Here’s how it works in practice (Australia-specific):

✅ When selling put options is permitted in an SMSF

An SMSF may write put options if all of the following are met:

1. The strategy is allowed by the trust deed

• The SMSF trust deed must explicitly allow derivatives and options trading.
• Many older deeds do not, so this is the first thing trustees must check.

2. It is consistent with the SMSF investment strategy

• The investment strategy must:
• Allow derivatives
• Explain the risk, liquidity, and cash-flow implications
• Demonstrate it is not speculative or reckless

3. The put option is fully covered

This is the key legal requirement. For a sold (written) put option, the SMSF must:

• Hold sufficient cash or liquid assets to meet the full purchase price of the shares if exercised

Example:

• Selling 1 put over 1,000 shares at a $10 strike
• SMSF must have $10,000 in cash (or cash-like assets) set aside

❌ Naked put selling (uncovered) is not permitted in an SMSF.

???? What is not allowed

An SMSF cannot:

• Use margin lending to support option writing
• Enter derivative positions that create leverage
• Sell puts where settlement would require borrowing
• Speculate in options without a genuine investment purpose

This ties directly to the SIS Act prohibition on borrowing and excessive risk.

The strategy you @Rick mentioned was one that Anirban Mahanti (MF – Extreme Opportunities and MF Money podcast fill in for @Strawman for a period) mentioned a few times as one he uses. He was using on US markets mostly, so dividend dates were not an issue, but it was a way of generating income and if the price dropped he wanted to buy the stock at that price anyway so was happy to have it exercised.

I have never used that strategy, probably never will but recognise it may be useful on occasions, but I don’t like it for continued or wide use. This is mainly because of the opportunity cost of needing to have capital available to buy if the put is exercised (although I like your use of European options to control this), which is ok for a once off, but having a few of these open at a time is a big commitment of capital.

The other issue I have, similar to covered calls, is that this strategy is a low volatility strategy, namely it works best in periods of low volatility. You are trading the opportunities associated with large price movements for a low yield but steady income stream. Which if that is what you want, then I see no problem.

For me the edge in using options is tapping into the Power Law distribution of the market. Option pricing is based on Normal distributions (Black Scholes uses standard deviation for volatility calculations based on the assumption that price movements follow a Normal distribution), so is ultimately incorrect. Generally when I use options I am looking to take advantage of the thick tail of outcomes from the Power Law distribution which is not priced in and doing so requires buying options, the longer dated the better.

If you are selling options (covered call or naked put), the pricing you get is essentially wrong because it will be based on the Black Scholes model which is what the market uses. So you will ultimately underperform the market (over an infinite number of trades, all other things being equal…). BUT you will have less volatility – which has it’s own value, so not necessarily a bad outcome if that is what you are seeking (bit like insurance).

Options are a zero sum game in financial terms (any financial gain is at another’s expense), where volatility over time is what is being traded. You can buy more or less volatility over a timer period, either is fine to do when appropriate to your objectives and circumstances.

PS: For anyone who doesn’t know the difference between European and American style Options it is simply that American style options can be exercised (settled) at any time up to the expiry date. European options can only be exercised at the expiry date, hence you don’t have to worry about early exercise if you have sold the option. Most exchange traded options are American style, I have only ever used American style.