In times of high market fluctuations, derivatives become essential tools for investors. This article examines five key tactics to protect and enhance assets.
The Foundation: Understanding Derivatives in a Volatile World
Derivatives are financial contracts whose values are derived from underlying assets like stocks or commodities. There are two main types: futures, which mandate a buy or sell, and options, which provide a right but not an obligation. These tools are used for hedging, speculation, and generating income.
The Tactics Explained: A Detailed Guide
1. **Protective Put**: A strategy protecting existing long positions, limiting losses to the premium paid.
2. **Protective Collar**: Combines purchasing a put option for protection with selling a call to lower or eliminate hedging costs.
3. **Bear Put Spread**: Profits from moderate price declines with defined risk.
4. **Long Straddle and Strangle**: Strategies that capitalize on sharp price movements regardless of direction.
5. **Covered Call and Cash-Secured Put**: Generate income but limit the potential gain from rising prices.
Real-World Examples of Derivative Use
Example of successful hedging: Newgen Distribution managed to avoid losses during the COVID-19 pandemic volatility using a strategic currency hedging approach. An example of misuse: the Barings Bank collapse illustrated the dangers of unchecked speculation and lack of proper risk management.
Derivatives are powerful tools in an investor's arsenal. When used correctly, they can protect assets and contribute to successful portfolio management during times of market volatility.
