28-08-2013, 10:38 PM
Seeing a lot of concerns from forumers about a possible crash. For those that want to stay invested and retain upside in stocks, but want some insurance against a market crash, a possible strategy is the market-neutral strategy.
What it is:
- Buy stocks that you think will out-perform the market.
- Sell an equivalent amount of MSCI Singapore futures (SiMSCI futures)
How it works:
- Say you buy $70,000 of Stock A, and SELL 1 unit of SiMSCI futures for 340 points (equivalent to a negative stock market exposure of $68,000)
- Touch wood, the stock market crashes by 40%, but luckily your stock only goes down 20%.
- The SiMSCI contract goes to 204 points, you make $27,200.
- You stock goes down, causing you to lose $14,000.
- Your net gains are $27,200 - $14,000 = $13,200.
- You make $ because you "outperform" the market by 20%.
- Without this strategy, you would have made a straight loss of $14,000 (20%).
Why it works:
- You need to "Outperform" the broad market. i.e. if the market goes down 10%, your stock needs to go down not more than 10%. if the market goes up by 10%, your stock needs to go up by more than 10%.
- This means that you need to have confidence in your stock picking skills and confident that your stocks will not do as badly as the broader market.
Risks:
- Your stock picking skills are lousy, your picks underperform the market. In that case, you still lose money.
- Market goes up, but for some strange reason, your stock goes down e.g. China Minzhong. Then you are really screwed on both sides.
Most Suitable For:
- People who have invested for some years, and are confident of their stock picking skills.
Disclaimers:
- For sharing purposes only, this does not constitute financial advice. Get it from a professional.
- I do not stand to make money from you trading in any of these products and am not affiliated with any brokerages or such.
MSCI Singapore Futures details:
SiMSCI details
What it is:
- Buy stocks that you think will out-perform the market.
- Sell an equivalent amount of MSCI Singapore futures (SiMSCI futures)
How it works:
- Say you buy $70,000 of Stock A, and SELL 1 unit of SiMSCI futures for 340 points (equivalent to a negative stock market exposure of $68,000)
- Touch wood, the stock market crashes by 40%, but luckily your stock only goes down 20%.
- The SiMSCI contract goes to 204 points, you make $27,200.
- You stock goes down, causing you to lose $14,000.
- Your net gains are $27,200 - $14,000 = $13,200.
- You make $ because you "outperform" the market by 20%.
- Without this strategy, you would have made a straight loss of $14,000 (20%).
Why it works:
- You need to "Outperform" the broad market. i.e. if the market goes down 10%, your stock needs to go down not more than 10%. if the market goes up by 10%, your stock needs to go up by more than 10%.
- This means that you need to have confidence in your stock picking skills and confident that your stocks will not do as badly as the broader market.
Risks:
- Your stock picking skills are lousy, your picks underperform the market. In that case, you still lose money.
- Market goes up, but for some strange reason, your stock goes down e.g. China Minzhong. Then you are really screwed on both sides.
Most Suitable For:
- People who have invested for some years, and are confident of their stock picking skills.
Disclaimers:
- For sharing purposes only, this does not constitute financial advice. Get it from a professional.
- I do not stand to make money from you trading in any of these products and am not affiliated with any brokerages or such.
MSCI Singapore Futures details:
SiMSCI details