Master Rider Blog

911

September 12th, 2007 NW Teong

While most market commentators have cited the expectation of a interest rate cut for the surge in US markets yesterday, I would rather call the surge a relief rally as we have witnessed a peaceful passage of the anniversary of 911. I am truly glad that 911 had passed without major calamities.  To be frank, the US markets are a little ‘boring’ at the moment. They are dancing to their normal tune of the various factors in play now. Simply put, the worry of economic slow down/recession vis-à-vis the expectation of interest rates cut. Hence, we would expect market to gyrate as usual, i.e. volatility remains high.

Frankly speaking, the hedge trades (insurance against my holding) that I did last week are in the red at the moment. In fact, I am glad to be in this situation as my holding is in the opposite direction of my hedge. For instance, if we bought an accident insurance, surely we do not hope to claim on this money. In short, I am happy to lose all my insurance premium for my hedge trades. However, the expiry date for my hedge is sometimes February next year. You see, my objective here is to cover the most volatile 3^rd quarter, perhaps till end of October. Hence, I have selected a Put warrant with expiry date well covered this period as my hedge target. Should anything happens (hopefully not) that causes the markets to fall sharply during this period, I can still book a good profit from my hedge positions!

In fact, today where STI index is currently trading at around 3,518 is another good level to execute our hedge. For those that wish to hedge against their portfolio, today seems to be another good day to do the hedge (what if Fed does not hike the rates, what if economic data are uglier than expected, what if China stock markets collapse, …etc events risk). As I mentioned before, for those who wish to hedge against their core holding, you may buy the Put warrant on STI index or Hang Seng Index (if you have regional exposure). Before you do that, please make sure that you do understand the option/warrant as an investment instrument. Please take note of the expiry date, conversion ratio, the exercise price and of course the premium that you need to pay for each Put warrant. After knowing these, you can then plan the amount that you decide to hedge, and the period that you wish to cover and work up the cost for this strategy. Cheers!

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Entry Filed under: Macro, Singapore