HOW TO HANDLE STOCK MARKET CORRECTIONS

What is a Market Correction?

A market correction is typically defined as a drop in stock prices of 10% or greater from their most recent peak. If prices continue down to the point where they are down 20% or more, it is then called a bear market.

Frequency of Market Corrections

·         Stock market corrections occur, on average, about every eight to twelve months.

·         On average, a market correction lasts about 54 days.

According to Fidelity (as of May 2010) Since 1926, there have been 20 stock market corrections during bull markets, meaning 20 times the market declined 10% but did not subsequently fall into bear market territory.

How to Handle Stock Market Corrections

If there was a way to “time the market” and figure out when it was going to go up, and then sell before a market correction occurred, well, who wouldn’t do that?

It seems there is plenty of information on the internet that suggests this is possible. Let’s think about this: if you had this skill, would you be writing articles on the internet... or sitting on the beach somewhere with your laptop, drinking a Corona and making money?

Most people lose money by trying to move their money around to participate in the ups and avoid the downs. This is a documented behavior which I discuss in Why Average Investors Earn Below Average Returns.

As a professional financial advisor, when we build a portfolio, we expect that one out of every four calendar quarters it will have a negative return. We control the magnitude of the negative returns by selecting a mix of investments that has either more potential for upside, which comes along with more potential for market corrections, or a mix that has less potential for high returns, and also less risk.

If you are going to invest in the market, it is best to understand that stock market corrections are going to occur, and it’s often best to just ride them out.

Think of it like going to an amusement park; you can’t get on the roller coast only for the up, and avoid the big downs. That isn’t how the ride works.

WHY PUTS COST MORE THAN CALLS

ITC 300 PUT ALMOST ACHIEVED 1ST TGT

FOR MORE CALLS FILL UP THE FORM GIVEN HERE>>>>
For almost every stock or index whose options trade on an exchange, puts are more costly than calls.

Clarification: When comparing options whose strike prices are equally far out of the money (OTM), the puts carry a higher premium than the calls. They also have a higher Delta.

·         This is the result of volatility skew. Let's see how this works with a typical example.

·         SPX (the Standard & Poor’s 500 Stock Index) is currently trading near 1891.76 (but the same principle holds whenever you look at the data).

·         The 1940 call (48 points OTM) that expires in 23 days costs $19.00 (bid/ask midpoint)
The 1840 put (50 points OTM) that expires in 23 days costs $25.00

The difference between $1,920 and $2,610 is quite substantial, especially when the put is 2 points farther out of the money. Of course, this favors the bullish investor who can buy single options at a relatively favorable price. On the other hand, the bearish investor who wants to own single options must pay a penalty when buying put options.

In a normal, rational universe, this situation would never occur, and those options listed above would trade at prices that were much nearer to each other. Sure, interest rates affect option prices (calls cost more when rates are higher), but with interest rates near zero, that is not a factor for today's trader.

So why are the puts inflated? Or if you prefer, you may ask: why are calls deflated?

The answer is that there is volatility skew. In other words,

·         As the strike price declines, implied volatility increases.

·         As the strike price increases, implied volatility declines.

Why does this Happen?
Over the years that options have been trading on an exchange (since 1973), market observers noticed one hugely important situation: Even though markets were bullish overall and the market always rebounded to new highs at some future time, when the market did decline, those declines were (on average) more sudden and more severe.

COVERED CALLS: AN OPTION STRATEGY FOR THE NOVICE INVESTOR

"BUY VEDL 95 CALL @ 0.50 TGT 1.25/1.75" 

"BUY ITC 300 PUT @1.40 TGT 2.20/2.90"

When learning to use options, covered call writing is a good, basic strategy to adopt because it offers the opportunity:

·         To own stocks with less downside risk, compared with other stockholders.

·         To earn more frequent profits and to have fewer losing trades compared with other stockholders.
Limited Profits

There is a cost to gaining those benefits. Profits are limited. Therefore, it is not appropriate to adopt this strategy when you invest in companies whose stock price is expected to double every year.

This strategy is for investors who want to earn good, but limited profits.

How it Works

1.       Buy 100 shares (or multiples of 100 shares) of a stock that you want to own.

2.      Write (sell) one call option for each 100 shares. That call is "covered" because you own stock that can be delivered to the call owner, if and when you are assigned an exercise notice. NOTE: If tiy do not own the stock, then the call sale is "uncovered" or "Naked."

3.      The cash (premium) that you collected when selling the call option is always yours to keep.

4.      By writing the call, you agree to the terms of the option contract. In this example, you are obligated to sell that stock -- at the option strike price -- but only when the option owner elects to exercise his rights to buy your shares.

5.      If expiration passes and the call owner does not elect to buy the stock, then the option is worthless and your obligations end.

Example

YFS (Your Favorite Stock) is currently trading at $43.80 and you buy 100 shares. 

Your outlook for this company is positive (that is why you are buying shares), and you hope to earn 10% to 15% per year as the company continues to grow. However, rather than just hold onto the shares, you adopt the covered call writing strategy with the hope of increasing your profits.

There are always several choices for an option to sell. They come with different expiration dates and different strike prices. Let's assume that you choose to sell one call option that expires in 60 days (Mar 19, 20XX). Let's further assume that you are willing to make a commitment to sell the shares at $45 per share at any time on, or before, that expiration date.

PRUDENT INVESTING WITH OPTIONS

HINDUNILVR CALL  GIVEN ON 11 JAN POST ROCKS..!!! ACHIEVED ALL THE TGTS

Prudent investor must act as other prudent investors who manage similar portfolios, with similar investment objectives, act. Professional money managers can exercise judgment when taking care of other people's money -- but they cannot take any action that is too risky -- they cannot speculate by buying options, nor can they trade penny stocks, etc.

The definition of a prudent investor has undergone major changes over the years and the prudent investor rule describes the standards to which managers must adhere when investing client money.

One hundred years ago, no manager would consider investing in the stock market. Before 1945, prudent investment professionals, and the law governing their liabilities, condemned stock investing as imprudent speculation.

Later (after WW2), as inflation became part of our lives and the legal view of stock investing changed, stocks became the core holding of most investment portfolios.

In modern times, as it became clear that few investment professionals could outperform the stock market (as measured by the performance of broad-based indexes, such as the S&P 500), the law came to accept passive investing (indexing) as a prudent strategy. Advisors may now own index funds and are not required to search for outstanding investment opportunities.

This simplified road to investing became the norm. Prudent money managers were pleased when they matched the returns of their peers. Imprudent managers remain in business. They seek higher returns by taking extra risk because they want to achieve results that attract new investors.

 As the market soared during the 1980's and 1990's those 'average' returns were more than acceptable to most investors as the value of their portfolios grew. When the bubble burst, and the markets declined, average returns turned negative. That’s when people noticed that hedge funds were outperforming the overall market.

 Although these funds keep their trading strategies secret, it is known that they take advantage of derivatives (including options) to find investment opportunities that are not available to traditional money managers.

THE INTELLIGENT BUT WORRIED BULL

Markets Rise; Markets Fall

When it comes to stock investing, one of the most accurate predictions remains: "Markets have their ups and downs." Sometimes the bulls win and sometimes the bears win.

One of the sad truths is that too many individual investors unload their holdings after a significant decline, missing out when the decline ends a a large rally ensues. Although good advice  (If you are an individual investor, do not try to time the market when investing for the long term) is easy to come by, it is understandable that people become frightened during market downturns.

When they lose enough, they sell everything, trying not to lose their remaining assets.

Options to the Rescue

If you have ever succumbed to that vicious trap, or if you are thinking about dumping investments to provide more security for your remaining assets, please reconsider.

Options -- the conservative and versatile investment tool -- can help you avoid making decisions that result in a financial catastrophe.

If you are a long-term investor (short-term traders have a different mindset and a different trading style) who occasionally thinks in terms of owning safer investments that come with built-in insurance against a huge loss, then options can be your salvation. But please understand: Options must be used wisely to achieve the peace of mind that comes with safety.

Option Strategies for the Bullish (but Frightened) Long-Term Investor

·     Very aggressive technique that allows you to remain fully invested, but which protects the entire portfolio. NOTE: "Protects the entire portfolio" does not mean that you will never lose money. Instead it means: If you pay a premium -- just as with an insurance policy -- then all losses become limited to a predetermined (and hopefully acceptable to you) sum. In other words, a stock market tumble will result in a monetary loss, but your portfolio will survive.

WHAT IS OPTIONS ? FREE OPTION CALLS FOR 12 JAN 2016

"BUY INFY 1040 PUT @ 25 TGT 43/64" 

"BUY HINDUNILVR 820 CALL @ 17.20 TGT 26.50/34.80"

Options are best tools to trade in Certainly Uncertain Market

Traders new to options find it difficult to understand options. Here is an attempt to present simple option trading strategies for new comers.

First a basic understanding of options

Basically two types of options exist: Call option and Put option.

• As you know option is a right and not obligation. For this right you pay a premium which is called Option Premium.
• Options expiry date is same as Future that is Last Thursday of settlement.
• If you have bullish view in any security you can buy call option
• On the other hand in case of bearish view you buy Put option.