Investment Tools to Consider in Times of Volatility
What is Volatility?
It is a period of time when markets or securities rise or fall sharply, and is usually characterised by wide price fluctuations and heavy trading. High volatility mostly associates with periods of falling prices.
What causes volatility?
Volatility is typically caused by events that trigger sudden mass selling of securities by investors or fund managers. For instance:
Non-ideal economic or financial reports
Geopolitical uncertainties
Pandemics
Other unforeseen (Black Swan) events
Bullish or Bearish
In times of volatility, you can either take a bullish or bearish view to benefit from market fluctuations in both ways.
Bullish View
If you have a bullish view, you believe that prices will rise.
You may then consider to take a ‘long’ position and benefit from potential rising prices.
Bearish View
If you have a bearish view, you believe that prices will continue to decline.
You may then consider to take a ‘short’ position and benefit from potential falling prices.
Investment tools to consider in times of volatility
There are Investment tools designed for individuals to trade over short periods of time, and on an intra-days basis. Listed on Singapore Exchange, the following investment tools issued by third-party financial institutions allow SIP-qualified investors to participate and benefit from both bear and bull markets.
Structured Warants issued by Macquarie Group
Daily Leverage Certificates (DLC) issued by Societe Generale
Structured Warrants
What are Structured Warrants?
Structured warrants offer investors an alternative instrument to participate in the price performance of an underlying asset at a fraction of the underlying asset price. Currently, the available underlying assets include both local and foreign single stocks and benchmark indices. There are two kinds of warrants:
Put Warrant (Bearish View)
Put warrant gives you an option to sell the underlying security at a fixed strike price on a predetermined expiry date. If the underlying security drops in price by expiration, you earn the difference between the market price of the underlying at expiry and the fixed strike price. You can also sell your warrant before expiry to lock in your returns.
Profit/Loss Per warrant
$
Price of stock
$
Breakeven Price
Exercise Price
Max Loss
Potential Profit
Call Warrant (Bullish View)
Call warrant works in reverse giving you an option to buy the underlying security at a fixed strike price on a predetermined expiry date. So if the underlying security rises in price by expiration, you earn the difference between the market price of the underlying at expiry and the fixed strike price. You can also sell your warrant before expiry to lock in your returns.
Profit/Loss Per warrant
$
Price of stock
$
Breakeven Price
Exercise Price
Max Loss
Potential Profit
Daily Leverage Certificates
What are Daily Leverage Certificates (DLCs)?
DLCs allow investors to gain fixed leveraged exposure to underlying assets such as market indices and single stocks. Investors with a bullish view can choose to buy a long DLC to benefit from rising prices, or a short DLC to benefit from falling prices.
Bullish View
Consider buying the long DLC to benefit from rising prices
Bearish View
Consider buying the short DLC to benefit from failing prices
DLCs offer investors fixed leverage of up to 7 times of the daily performance of the underlying asset (e.g. market indices or single stocks).
If the underlying asset increases 1% today
Value of the Long DLC will rise by 7% while the value of the Short DLC will fall by 7%
+7%
If the underlying assets decreases 1% today
Value of the Long DLC will fall by 7% while the value of the Short DLC will rise by 7%
-7%
If the underlying asset moves in a direction against you, your losses will also by amplified by 7 times.
