Investors are becoming more eager to use options to counter market turmoil. Turmoil in financial markets has left investors looking for attractive ways to hedge portfolios and make a profit in falling markets.
Options may also come in handy on bear markets or unstable markets and in situations when the prices of currencies, commodities or equities cannot be easily foreseen. “Market volatility has been very high and the investment risk has been growing. There are many reasons to be worried, from the unpredictable decisions of central banks to geopolitics. If you adopt an adequate investment strategy, options will enable you to control the chaos and even profit from it. Hence the growing popularity of stock options and contract options, as well as forex options”, says Maciej Jędrzejak, Managing Director at Saxo Bank Poland.
More and more surprises
Central banks’ flip-flop rhetoric is providing for great anxieties among investors. At the end of January, when the Federal Reserve announced that the rates would remain unchanged and expressed its concerns about economic growth, the stock market in the US fell more than 230 points. A couple of days later, Bank of Japan announced its negative rates and equity prices surged.
“How could one keep cool and stay on course with their investments?” asks Patrice Henault, Head of Futures and Listed Options at Saxo Bank. Options are the remedy for market frenzy and unpredictability. An option is a financial instrument that gives the buyer the right, but not the obligation, to buy or sell an underlying asset – e.g. stocks, indices, and currencies – at a specific price on or before a certain date. The put option is used when the buyer thinks the price of the asset will fall before the option expires. Call option is used if the investors expect the asset to increase in price. The seller of the option has a corresponding obligation to fulfil the transaction should the buyer decide to “exercise” his right. “Options provide an additional set of investment opportunities that investors can use in times of turmoil. An investor holding shares in Deutsche Bank can for example use a put option to completely or partially protect their investments as they can use the option in the same stock or index to neutralise price falls. In this way options works a lot like insurance. If we purchase insurance to protect our house against fire or damage why not protect our life-saving investments as well?” says Patrice Henault.
Faithful ally: new technologies
One of the advantages of options is that the investor can take part in the asset’s price movement at a much lower cost than holding the actual asset. The increased popularity of options is the result of more investors using put options to “go short” in the market, and make a profit even when the equities fall. “It is only the beginning: the popularity of options will be growing,” says Maciej Jędrzejak.
Options are a tool whose mechanism should first be well understood before it can be applied to individual investment strategies. “The only reason why more investors are not using them is that they lack the proper knowledge and education. We are working hard to provide options education in a group environment through webinars, blogs and workshops to our clients. Education, combined with state of the art investment technology and the multi-asset offering is what investors demand today. It’s fascinating as just a decade ago, trading technology, multi-assets including option trading was only available to Wall Street. Today, financial firms like Saxo Bank bring it to Main Street. We have it at our fingertip and it’s empowered investors like no other time before,” says Georgio Stoev, Futures & Listed Options Product Manager at Saxo Bank.
The retail investors segment on the global options market has never been healthier. Retail participation continues to expand and now represents 24% of the volume traded on the US Stock Options market, according to the OCC (the US clearing house of Stock Options and ETF options). Investors are getting smarter about how they use options, with managing risk exposure a growing focus.
Learn more about using stock options in your investment strategies on 1 March during a free seminar led by Georgio Stoev. For seminar details, click here: http://pl.saxobank.com/lp/cp/stock-options-seminar.
Saxo Bank offers a wide variety of options including 45 FX options, 640 stock options and 167 contract options. The most popular currency options among Saxo Bank’s clients are:
USD: Over the past months we have seen an increased interest in buying USD put options mainly against EUR. The stressed stock markets and the overall “risk off” sentiment has made investors question the path of the US rate hikes and the strong USD.
GBP: We see increased interest in buying options with expiry after the UK referendum at June 23. This is a good example of investors buying longer dated options.
CNH: The discussion of a potential currency devaluation of the Renminbi is causing investors to hedge their exposures with put options on CNH and USD call options on the other side.