In volatile times investors must consider their options
INVESTORS have had a rough 2012 thus far. While the bright start to the US first quarter earnings season gave cause for optimism, as did encouraging French and Spanish debt auctions, lingering Eurozone fears and a “wait and see” policy on further monetary stimulus from both the Federal Reserve and the European Central Bank left investors nervous. We have also seen Spain and the UK fall back into recession and an increased focus on European politics. France elected a new Socialist President and this result, combined with the forthcoming polls in Greece and election results in Holland and Germany, have seen a public rejection of austerity coupled with heightened anxiety among investors about the fate of the Eurozone. The Bank of England recently elected to keep rates on hold at 0.5 per cent with no change to its quantitative easing strategy (although the latter is currently under review).
Those investors who “sell in May and go away” appear to have it right. Early 2012 FTSE gains have already been wiped out. It’s nervous times for equity markets as investors ponder the repercussions for the Eurozone if Greece exits. Analysts saw the failure of the FTSE to hold 5,496 as an indication of a leg down and focus falls on 5,107 as the next significant support level with 5,496 now becoming the new resistance level.
So what does this mean for investors? For some it’s an opportunity, for many it’s a time to protect their portfolios. In such prevailing market conditions, one of the more useful tools being adopted is the trading of equity options and in particular the writing of covered calls.
COVERED CALLS
For investors who are unwilling to sell their shares and reluctant to commit extra capital to the markets this is a third option and a useful investment tool. Investors can sell a call option against an existing share portfolio and thus receive an extra income from premiums received (as well as the dividend yield) while keeping their portfolio intact. This is a useful strategy and could increase the return on capital in neutral or bearish markets. As with all forms of investing, the key to successful trading lies in the strategies used by the investor.
For a complimentary guide on option strategies please email [email protected]
Julia Williams is head of private client services for Sucden Financial.