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Slow and Steady
Issue // March 7, 2023
UPDATE
Spring Break Fast
By The MARK IT. Team
🌤️ Good morning, and happy Tuesday. We hope your week got off to a great start yesterday. Sunday next week will be when we all set our clocks forward for daylight savings, just in time for spring break. If this is your last week of school or work before the break, we hope you can finish off strong, and dive into a well-deserved break.
Did you know today is National Cereal Day? Whether you like sugary-chocolate cereals or honey granola cereals, we hope you’re munching on a bowl of your favorite breakfast cereal this morning as you read this week’s edition. We have a great piece by one of our new contributing editors in our MARK IT. Explained section below.
WEEK IN REVIEW
4000, Take It or Leave It
By Abbas Akhtar
Last week was largely green for the overall market. Since last Thursday, the S&P was on a strong upward trend that lasted until Monday morning. At this time, the index (again) crossed back over the 4000-point mark after rising 3.39%. In last week’s issue Chat & Chat, we talked in part about the volatility that the index was facing the week before. Last week was a welcome break from that.
Several stocks we have reported on in the past saw substantial increases in their share prices last week. Between late Thursday and early Friday, Amazon saw a 3% increase in its share price from $91.86 to $94.72. Snapchat, which we reported on last week, saw a whopping 12.71% jump from 8 PM Friday to 11 AM Monday.
S&P 500 Index (5-day), via Google Finance
WEEKLY WATCHLIST
Looking Ahead
For this week, we don’t have any undervalued stocks to report on. Right now, we’re seeing growth in many blue-chip stocks, which may not continue in the short term. Instead, we want to look forward to this week and highlight why there is some anxiety among investors.
Today and tomorrow, Federal Reserve Chairman Jerome Powell is set to testify before congress about the role and future of monetary policy. Among lawmakers, there is concern that the FED’s interest rate hikes in the past, and any planned rate hikes, may slow down economic growth as a side effect of combatting inflation.
Investors also worry that efforts to cool down inflation may result in an overcorrection and send the economy into a recession. This may affect the output of certain companies and industries, which is bad news for investors and the employment rate. That being said, it’s unlikely that Chairman Powell’s remarks tomorrow will have a significant impact on markets for the rest of the week. However, investors and lawmakers are eager to hear any monetary policy plans. Read our article below to see how investors manage risk during potential downturns. Source: CNBC
MARK IT. EXPLAINED
Hedging Your Bets Against a Losing Market (How Does It Work?)
By Brendan Miles
Portfolio hedging is a crucial risk management strategy used by investors to protect against the risk of losses in financial markets. The underlying principle of hedging is to decrease overall investment risk by investing in assets or securities that have an inverse correlation to the primary investment. As the security or overall market decreases in value, the hedging instrument will appreciate, offsetting losses.
Options, which provide the holder with the right to buy or sell an underlying asset at a predetermined price and time, are popular hedging instruments. Suppose an investor owns a portfolio of stocks worth $100,000 and believes that the market may decline in the near future. The investor could purchase put options for either the underlying security or an index that tracks the portfolio, with a strike price of $95,000 and an expiration date of three months from now, for $3,000. If the market does indeed decline and the value of the stock portfolio falls to $90,000, the put option will appreciate in value, offsetting $5,000 of the $10,000 loss in the stock portfolio. This results in a net loss of $5,000 instead of $10,000. On the other hand, if the portfolio appreciates, the investor is only capping his possible gains.
Alternatively, an investor could sell call options on the stocks they own to generate income. Suppose an investor owns 1,000 shares of a stock trading at $50 per share. They could sell call options with a strike price of $55 and an expiration date of three months from now for a premium of $3 per share, generating $3,000 in income. If the stock price remains below $55, the investor will keep the premium and their stock. However, if the stock price rises above $55, the investor will be obligated to sell their stock at $55 per share, but will still keep the $3 per share premium they received. This strategy caps the overall appreciation but also enables the investor to harvest some returns in advance.
Portfolio hedging is an essential component of risk management for investors and options remain one of the most important instruments for limiting risk.
ONE MORE THING
Keep in Touch
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