Finance

The global stock market has been on course of gains for five months as the price level recovery and trade induced by the United States elections shows its resilience.  There has been a strong growth in the largest economies of the world and the developing markets which has enabled the strengthening of this growth. This is amidst doubts from different quarters about the ability of the newly elected US administration to enact policies that are can support this growth (Herron, 2017).  The US stock market is moving on facilitated by better data, and this in turn has been enabled by a rebound in investors risk appetite.  The various sectors in the market face various uncertainties and growth opportunities driven by the change in government and the external pressures such as the successful Brexit Vote.  Any increment on government spending on infrastructure such as roads and military has the potential to impact on materials, energy and industrial stock (Herron, 2017).

 The stance of the new administration on environmental and financial regulation may lead to varied effects on the energy and financial stocks in the U. S markets. The stocks of health care firms may be driven by the advancement on various treatments and prevention drugs.  The biggest impact may be influenced by the big data sector, like real estate stocks which normally run modern data centers and warehouses and one can capitalize on this trend for better returns on investments (Herron, 2017).  The aim is therefore to invest in the stock market especially those that are being driven by big data since the show a high potential for future growth and better returns on investment. The U.S market may lead the international outlook since effects of European political path , monetary policy have not affected the higher valuations for the U.S stock index in comparison with international stocks (Fidelity Investments,2017).  The goal is to trade in the real estate shares in the United States stocks market.

The prediction for the real estate shares (IYR) in the next one month indicates a buy option falling between $ 77.76 and 78.07. This shows that the housing market has home prices will continue to have a steady period to period gains based on the track of real estate data from the simulations .  The real estate can augur well with the overall goal of securing future profits from a great amount of capital. This is an indication that home prices are more than likely to appreciate in future, even though they have weakened in the past.  With account equity of $ 25,000, the stock in real estate represents a good buying option.  The married put strategy was chosen for this investment which is also necessary in hedging the investment against future uncertainties. Married put serves a hedging tool since it allows for realistic forecast and expectations on the performance of the market (Olmstead, 2012).The goal of the investment was to achieve a net price for the iShare IYR of $ 90 over the short period of one month ending on April 17

Considering these are futures orders, there various risks that may relate to the movement in the markets and may lead to absence of closing transactions that have been executed.  The real estate is normally a cyclical industry whose prices are also volatile due to sensitivity to economic conditions prevailing locally and nationally, the interest rates, tax rates imposed on property and other related factors. A shift in the values real estate and even economic downturns may have considerable negative impact on the issuers in this industry. IYR is usually an EFT (Exchange Trade Fund) and hence represents a range of assets and due to its diversification, and investment in EFTS can be considered to be a strategy of lowering the risk as compared with investing in just a single asset (Olmstead, 2012).  IYR can also be said to encounter a high volatility and in the past, this market has had a volatility of between 13.3 % and 16.5 % per year.  Volatility is a measure of the extent to which a given asset moves up and down.  The liquidity of IYR can be said to be high due to the ease of bringing it into the market without any effect on the price of the involved asset.  It has a high volume of average daily trading. Given that the investment is faced by low risks, it suits those investors with a preference of assets with potentials for long-term growths that are likely to have a higher dividend payment for investors (Whaley, 2007).  Hence, IYR as an EFT investment tends not to follow the stock market which begins with a positive trend. Because of the nature of this product, high volatility and liquidity, IYR can be said to be an investment that involves very high risks.  A diversification on portfolio may fail to protect the investment against various risks in the market arising from credit risk, economic conditions and the fluctuations in the rate of interest.  The iShares Fund are normally bought or sold at the prevailing market prices and cannot be redeemed individually from the fund (Whaley, 2007). In this investment the past performances cannot be a guarantee for better results in the future and hence this investment faces major risks that need to be considered when choosing the investment strategies and the need for hedging.  This is due to the fact that those funds which focus   the investments on one single sector become more exposed to factors that affect the sector. They are also more volatile than funds that are directed in the investment in various sectors in the market. The price-to-earnings ratio is an essential measure that can be used in determining the value of this investment considering the degree of risks it has to experience.

 The right strategy for investing in IYR ETFs is the marriage put strategy, which can be used even when the investment on a stock or fund has already been made, and there is an overall optimistic attitude towards the investment (Whaley, 2007).  The strategy us best for this investment since it involves a long position in the fund or stock and it could be possible to buy a position of put option that is equivalent to the long position in this investment.  Therefore, some protection is provided by the buying of the put options, against any short-term fall in the prices and a level of maximum loss can be established in case there is an instant downside to a market reversal.  The nature of IYR EYF shows that real estate is a trending market on the basis of a long-term period of investment.  It goes through considerable and sudden changes in prices (Olmstead, 2012).  On the basis of price action, the results of IYR ETF simulations indicate that IYR has been solidly bullish since the initial order for the buy option.  It is interesting how the prediction for the futures all time high stands at about $ 88.7 for a period exceeding a month.  Stocks that experience a sharp decline in prices from their peaks normally have hard time while trying to increase at a level similar to half of the previous high. It would not be surprising then that for the above stock, the forecast indicates a high close in a period of more than one month.  As such, IYR’s   price increase could be interesting in case of a put option.  A short term interest on the IYR with a steady rise could be an indication of investor’s negative sentiment.  The marriage put strategy can serve to target a low price position for an individual stock that comprises of EFT and allow it to grow steadily over a long period of time.

A married put is an effective strategy that can be employed in case the options trader is optimistic about a given stock, needs benefits from the ownership of the stock but is cautious about the risks and uncertainties in the future (Yates, 2003). Hence given that IYR faces high level of risks both in the short-term and long-term and this strategy in the presence of such risks. The result is that the strategy is bullish, has limited level of risk and unlimited potential for returns on investments. It can be used also as a form of core holding or in fine-tuning the future investment mix.

A change in strategy from the marriage put to protective collar has shifted the prices of but does not lead to the achievement of the set goal. The  marriage put strategy had yield the highest future net price at $ 88.7  for the placed bid , which means that the target was missed with  about  $ 1.3 in net price. The change to protective collar strategy has resulted to a shift in buy option price to $ 77.8. In addition, the net price for this option for the period ending 17^th April reduced to $ 87.61, and indication that even after the change in the strategy, the goal set for $ 90 has not been met, and the target was missed with $ 2.39. Hence, the change in the strategy was not enough to enable the achievement of the set target in this investment. 

The change in the market trend can be due to other factors that cannot be controlled by adopting a different strategy such as the interest rates and the prevailing economic conditions.  The change in to the protective collar strategy was best for the already established long-term positions and the substantial amount of profits at $ 11 .2 per unit of the ordered quantity. From this trading activity , an important lesson learn is that investing in the stock market requires  the choice of the right strategy , evaluation of the risks involved in choice of the investment .  In order to achieve the set goals, it is important to try out view strategies for the purpose of hedging in market that is full of uncertainty.

Reference

Olmstead, W.E., (2012).Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks. FT Press

Whaley, R. E. (2007). Derivatives: Markets, Valuation, and Risk Management. Hoboken: John Wiley & Sons. 414-415

Yates, L. (2003). High performance options trading: Option volatility & pricing strategies. Hoboken, N.J: J. Wiley. 2-4

Herron, J., (2017). U.S. Stocks Rise With Oil, Pound Falls on Brexit: Markets Wrap. Retrieved from: https://www.bloomberg.com/news/articles/2017-03-28/stocks-climb-as-yen-weakness-to-buoy-japan-shares-markets-wrap