Protective Put. When market volatility is reduced, the launch strategy and covered less attractive investment alternatives as the "Protective Put" is favorably positioned between the potential investors, with more going for it after the strong gains seen in several papers.
For
Diego Rebissoni * Proper way to synthesize this investment is to start with the results: this strategy behaves like the holding of a share in a rising market but bounded market losses bears. Clearly this advantage, bounded loss, costs, and is the premium or insurance or must pay to secure a selling price of the shares. In short, the strategy will explain in the following paragraphs, investors capture profits when the share price rises, but if their actions do not perform well, they will face loss of investors is bounded because insurance paid for sale shares at a price fixed and known.
then describe the key steps for developing the strategy, which initially consists of two financial transactions. The first is buying a stock and the second purchase of a put or a option.
Like stocks, bonds and other financial assets, put options traded on the Bolsa de Comercio de Buenos Aires, although it is worth stopping at some clarifications regarding liquidity. These products are illiquid and are not available on all stock, usually available only on Tenaris, Grupo Financiero Galicia and Pampa Holding. Liquidity also tends to focus on few species and the maturity pairs.
Our first step in the "Protective Put," is to buy a stock, where probably most investors know how to perform this operation. In the second step, we purchase a selling or put option by which we pay a premium, and this will give us a right to sell the shares we bought at a particular value or strike price. This second stage will provide us with bounded losses in the bear market.
At this point, it is worth dwelling on some important clarifications:
1 - How to choose exercise price for the purchase of law? My advice is to start with exercise prices (base) near the market price action. For example, if Pampa (PAMP) traded at 1.69 pesos, choose one of the bases available closer to that value (the bases are predetermined and should be chosen from those available). In this case, the choice would be "PAMV1.64FE" where "PAM" is an option on the shares of Pampa Energy, "V" is "sale" type of option 1.64 is the exercise price, and "Faith" is February, the month of expiry of the option. The price we pay for this right to sell shares of energy Pampa $ 1.64 per share is $ 0.05 per share (closing price of the premium) and we can exercise this right as long as it suits us but we have no obligation.
2 - The options that we buy have an associated date representing the time to which we can exercise the right purchase. In our market maturity occur on the third Friday of each month. At this point we return to make a clarification on liquidity, start recommending even months.
Now we will study how our strategy is (gains / losses) for different scenarios and what the financial transactions we make in each case.
Case 1, Bear Market Event: Starting price of Pampa
Energy (December 23) 1.69 Final price of Pampa
Energy (February 19) 1.32
The stock has fallen in value and we have the ability to sell our shares at a higher value (1.64) of its contribution (1.32). Exercise our right and sell at the price exercise.
score = -0.05 (or insurance premium paid) + 1.64 (price received by the wholesale price) - 1.69 (price paid for the initial stock at the moment) = -0.10 $ / share
Importantly
this negative result holds for any assumed value of Pampa Energy
less than 1.64 and therefore, if Pampa falls more than 1.32, our result is fixed, our loss is bounded. Lose 0.10 per share, while
that the shareholder registers a greater loss. (For our example -1.69 +1.32 = -0.37)
Case 2, Bull Market Scenario: Initial price of Pampa
Energy (December 23) 1.69
final price of Pampa Energía (19 February) 1.98
The stock has risen in value and we have the ability to sell our shares at a lower value (1.64) of its contribution (1.98), therefore we do not should exercise our right and sell the shares at a price assumption of 1.98.
score = -0.05 (or insurance premium paid) + 1.98 (price received for the sale of shares in the market) - 1.69 (price paid for the action in the initial time) = +0.24 $ / share
Comparing the second case who bought stocks only (and did not make this strategy) your profit is 0.29 per share. If we simulate scenarios bulls not realize that the cost of the premium is not very relevant in terms of percentage. Below are several scenarios are simulated and compared the results between those who carried out the strategy and bought shares directly and not pay the insurance.
To conclude this article I leave some important considerations:
"This strategy is attractive when volatility is low because the insurance we pay is small. When markets are very nervous insurance are usually very expensive.
-also an investor has not faced the following dilemma. The market has risen sharply, "I stay outside and wait? Suddenly
note that market remains bullish and lost train fabulous performance. For those who now make these questions the strategy "Protective Put is a considerable alternative.
"Finally we must not neglect the liquidity constraints facing us to buy these tools and be very attentive to the daily movements to execute the warrants.
* Diego www.leiod.com.ar Rebissoni is the creator of a site that seeks to improve trading options in the area of \u200b\u200bthe Bolsa de Comercio de Buenos Aires, offering training, doing reports, and writing articles of interest to users.
