MINING AND OIL POPULAR SECTORS
ALEXANDRE HOUPERT
HEAD OF LISTED PRODUCTS UK, SG CORPORATE & INVESTMENT BANKING
IN THE current market climate, investors might be afraid of choosing single stocks and exposing themselves to all the risk that cherry picking entails. Instead, they are increasingly choosing to take out a position on a sector in order to spread the risk.
We’ve witnessed this phenomenon with the rise in sectoral ETFs. Oil and mining have been popular sectors during the last few months. China and emerging countries are growing strongly and leading the global economic recovery.
Their need for raw materials is attracting investors who would like to take advantage of this growth. However, choosing one single company could not be that easy and investors might be concerned that individual stocks will run out of steam.
In this case, choosing a global index like DJ Stoxx600 Oil and Gas or Basic Resources indices as the underlying asset could be a possible speculation strategy to put in place. Call covered warrants on these sectors would be used to implement a more aggressive investment.
Alternatively, you might have existing positions in stocks in these sectors and want to hedge against potential losses, should the market suddenly reverse.
If you are looking to protect your portfolio of mining or oil stocks, then you would look to buy a put covered warrant on one of these indices. The December 2010 maturity would offer a long-term perspective. This expiry date tends to be well suited to investors who believe that a correction could well occur over the next two quarters. There is still enough opportunity for their view to be realised without a detrimental deterioration in time value.
Hedging with covered warrants has an advantage over using other derivatives on the same underlying product because the maximum potential losses on the hedged position are limited if the market were to keep on rising.