How to use stock index options?

1. Stock index options allow investors to take long and short positions on the market without having to buy or sell the stocks that make up the index.
2. A stock index option is a put or call written on a market index.
3. Options are offered on most of the major stock market indices.
4. Settlement for stock index options is in cash rather than stocks.
5. If you think the market is going to decline, you can buy a put option.
6. With stock index options you can track the markets without having to buy or sell the stocks.
7. Options on stock indices are valued and trade in the same way as options on individual stocks with the notable exceptions that settlement is made in cash for the former.
8. The use of stock index options can assist individual investors with large stock portfolios to hedge against potential losses.
9. If the investor does not want to sell holdings of appreciated stocks int he portfolio, the investor can protect these gains by buying stock index put options.
10. If the market declines, the stock index puts will rise in value, which will  offset the losses on the individual stocks.
11. Instead, if the investor wrote call options on the stock index resembling the portfolio, the value of the options would decline if the market declined. 
12. The stocks in the portfolio would lose value, but this loss would be offset by the premiums received from writing the call options.

Related:

Options, rights and warrants

Should you bother with options, rights, or warrants?

http://www.investlah.com/forum/index.php/topic,42222.0.html

International Stock Markets (52-week performance)

International Stock Markets

• AMERICAS
• EUROPE
• ASIA/PACIFIC
• MIDDLE EAST/AFRICA

Key Indexes	At 8:46 PM ET At least 15-minute delay	Change	% change	1 month	1 year	LowHigh52-week
Nikkei 225 JAPAN	8,314.74	–33.53	–0.40%	–4.20%	–17.80%
Closed for holiday, prices at close 11/22/2011
Hang Seng HONG KONG	17,902.02	–349.57	–1.92%	–0.69%	–21.81%
Shanghai Composite CHINA	2,415.36	+2.74	+0.11%	+4.23%	–14.60%
All Ordinaries AUSTRALIA	4,161.40	–42.77	–1.02%	–1.00%	–11.02%
NSE 50 INDIA	4,812.35	+34.00	+0.71%	–4.70%	–19.93%
At close 9:01 PM ET 11/22/2011
STI SINGAPORE	2,679.55	–37.65	–1.39%	–1.21%	–14.29%
KOSPI KOREA	1,826.28	+6.25	+0.34%	–0.66%	–5.32%
BSE 30 INDIA	16,065.42	+119.32	+0.75%	–4.29%	–19.50%
TSE 50 TAIWAN	4,797.27	–72.82	–1.50%	–3.73%	–16.04%
KLSE Composite MALAYSIA	1,428.63	–9.36	–0.65%	–0.71%	–3.96%

Coming Market Holidays

http://markets.on.nytimes.com/research/markets/worldmarkets/worldmarkets.asp

Sharemarket basics: An index can be your key pointer

By Chris Walker,
Money Magazine, February 2010

Want to see at a glance how the sharemarket or market sector is performing? No problem – there’s bound to be a share index to help you.

Tune into any shares report on radio or TV, pick up the newspaper’s financial pages or check out the markets online, and you’ll come across a constant – sharemarket indices.

These provide a simple and revealing indication of how the markets are travelling. Arguably the most quoted Australian sharemarket index is the All Ordinaries, often referred to simply as the “All Ords”.

The UK equivalent is London’s FTSE 100 (often called the “Footsie”), in New York it’s the Dow Jones Index, in Tokyo it’s the Nikkei and in Hong Kong, the Hang Seng.

When a sharemarket index is newly created, its starting day is given a base value. Ongoing changes in the market’s performance are then measured in relation to that opening value.

For example, if the index rose from a starting value of 1000 to 1058, the overall value of the parcel of shares included in this index would have risen by 5.8%.

The S&P/ASX All Ordinaries Index was established in 1980 with a base value of 500. In mid-February, 2010 the index was around 4900, an almost tenfold increase in the share price of the companies.

Since April 2000, the All Ords has tracked the value of approximately 500 of Australia’s largest listed companies by market capitalisation, which effectively accounts for more than 95% of the value of all shares listed on the ASX.

Market capitalisation is calculated by multiplying the number of shares on issue by the share price. For example, the largest company on the ASX, BHP Billiton, has a market capitalisation of around $220 billion and accounts for about 14% of the value of the entire market. The 10 largest companies listed on the ASX account for some 45% of the total market’s capitalisation (as at January 12).

Ten years ago ratings agency Standard & Poor’s launched a number of other key Australian indices, with a narrower focus than the All Ords.

These range from the S&P/ASX 20 index, tracking the market’s 20 largest listed companies, to the S&P/ASX 300, the largest 300 companies.

Probably the most significant and oft quoted is the S&P/ASX 200, made up of the 200 largest companies on the ASX and representing about 78% of the market’s capitalisation. But the old All Ords refuses to lie down and continues to grab most of the attention, certainly from the media.

Most indices are price-only indices, meaning they only measure growth in share prices. For a more complete picture it’s worth looking at the various “accumulation” indices, which include dividends paid by the companies in the index.

The S&P/ASX 300 Accumulation Index, for example, is basically the same as the S&P/ASX 300 Index, except that it assumes all dividends are reinvested in the companies issuing them.

Many managed funds actively manage their investment portfolio and attempt to better a particular index they nominate as their benchmark.

Other managed funds, notably “index” funds, try to replicate the returns of a benchmark index, such as the S&P/ASX 200, by holding shares in the same companies.

Index funds tend to live up to their stated investment return goals, namely to match a specific index’s performance, more reliably than actively managed share funds.

In addition to broader market indices there are market sector indices such as the S&P/ASX 300 Metals and Mining Index, or the S&P/ASX 200 Financial Index which contains companies from the top 200 list (by market size) involved in activities such as banking and insurance.

Indices give you an instant guide to whether a market is rising or falling, be it on a daily, weekly, monthly or annual basis.

Their value to investors is they allow you, quite simply and almost at a glance, to benchmark the performance of your shares against the performance of the overall market or the relevant market sector.

This is vital information in determining which shares to buy, hold or sell, and how to best manage the overall weighting of the share component of your portfolio. Share investing would be more difficult without them! For more information on indices, visit the ASX’s website www.asx.com.au.

http://money.ninemsn.com.au/article.aspx?id=1007144

The stock market provides a market for setting prices based on supply and demand

More about the stock market

The stock market provides a market for dealing in listed shares, and for setting prices based on supply and demand.

It is for this reason that prices of equities fluctuate.

Just as in any open market, prices will go up if there are more buyers than sellers and vice versa.

Most of the buying and selling occurs electronically today.

The performance of the stock market is often gauged by the performance of an important index.  An index reflects the performance of a grouping of shares. 

The best known index in the world is the Morgan Stanley Capital Internation (MSCI) Index, which represents the biggest shares in the world based on market capitalization.  When the prices of these shares dip, the index will also go down, and vice versa.

For each country, the main index consists of the biggest shares based on market capitalization.  There are also other sub-indices (financials, industrials, mining, etc.).  Each of these indices represents a certain grouping of shares based on their market capitalisation.

Market Timing: Taking advantage of the periodic bouts of market madness

The most important use of past information is to tell us when the market has moved too far out of line. 

By looking at the chart, you would have noticed that the price rises of 1972 or 1981 or 1987 (or 1993 or 1996 or 2007) were excessive and could not possibly be sustained.  If we were rational at that time, we should have liquidated our holding and got out of the market.  (wishful thinking!! worth a serious look into!!!)

Similarly, in 1975 or 1976/1978 or 1986 (or 1998 or 2008), by looking at the chart, we could have seen that the market had become very undervalued and we should have increased our holding, even if it meant that we had to borrow money to do so.  (shocking!!hmmm!!!)

For the rest of the time, we should buy individual shares as and when we believe they have become undervalued, keeping the chart in the background as a point of reference when we evaluate individual shares.  So long as the market as a whole is not too far above the trend line, we can purchase shares which are undervalued according to our computation.  Provided we are reasonably good in our valuation, the long-term improvement in the market should ensure that we make money over the long run.  (very sound advice indeed)

At times, the market may fall below or even well below the level at which we have made our purchases.  This should not worry us because we have based our purchases on good dividend yield and we do not need to sell.  Furthermore, we can take the opportunity to buy more shares and average down the prices of our investments. 

Occasionally, we may even stand to make a lot of money by selling out if our chart tells us that the market has gone mad, as it is prone to now and again. 

We are therefore practising a very defensive strategy, only buying if the shares are undervalued and quickly selling to take advantage of the periodic bouts of market madness when they occur.


Ref:   Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean

Past Market Movements: Big Booms Are Irregular

Examination of Past Market Movements of Malaysia KLSE
What can we learn from the history of overall market movements in the Malaysia KLSE?

1. Generally Upward Trend
2. Trends Not Consistent
3. Irregular Price Patterns
4. Prices Can Be Very Volatile
5. Prices Move Volatile Upward
6. Big Booms Are Irregular

-----

6. Big Booms Are Irregular

It appears that the big booms take place somewhat irregularly.

There have been three in the last 18 years from 1970 to 1988; 1972/1973, 1980/1981 and 1986/1987.

Not only are they irregular but they are of short duration, one to two years appears to be the usual length.

This means that it is difficult to catch a big boom at its beginning.

If one goes in after the market has already moved up a great deal, there is a big risk that the market will crash shortly after.

Past Market Movements: Prices Move Volatile Upward

Examination of Past Market Movements of Malaysia KLSE
What can we learn from the history of overall market movements in the Malaysia KLSE?

1. Generally Upward Trend
2. Trends Not Consistent
3. Irregular Price Patterns
4. Prices Can Be Very Volatile
5. Prices Move Volatile Upward
6. Big Booms Are Irregular

----

5. Prices Move Volatile Upward

It appears that prices can move very much further from the trend line on the up side than on the downside.

Except for a short period at certain times in severe bear market or market crash, the prices do not move very far from the trend line on the down side.

But it can move a considerable distance on the up side.

It would appear also that there are more up years than down years. This means that the prices tend to build up slowly over several years and then fall much faster than they rise.

However, big upward movements tend to be followed by sharp downward movements. It is thus a lot safer to buy when the prices are below their intrinsic value than when they are high.

Past Market Movements: Prices Can Be Very Volatile

Examination of Past Market Movements of Malaysia KLSE
What can we learn from the history of overall market movements in the Malaysia KLSE?

1. Generally Upward Trend
2. Trends Not Consistent
3. Irregular Price Patterns
4. Prices Can Be Very Volatile
5. Prices Move Volatile Upward
6. Big Booms Are Irregular

-----

4. Prices Can Be Very Volatile

The price movements even within a year can be considerable - the average is 38%.

The minimum movement within a year is still 19% from the highest to the lowest which is about six times greater than the average dividend yield.

This means that price changes can very quickly wipe out any return provided by dividend.

This means that the value of one's investment can vary considerably from year to year.

One must be able to sustain such losses if one wishes to invest in shares.

Past Market Movements: Irregular Price Patterns

Examination of Past Market Movements of Malaysia KLSE

What can we learn from the history of overall market movements in the Malaysia KLSE?

1. Generally Upward Trend
2. Trends Not Consistent
3. Irregular Price Patterns
4. Prices Can Be Very Volatile
5. Prices Move Volatile Upward
6. Big Booms Are Irregular

----

4. Irregular Price Patterns.

Although the price movements appear to be centered around the trend lines, they do not appear to be regular. Small troughs can be followed by big peaks and vice versa.

The period in which the market prices stay above or below the trend line is not regular either.

The market can stay under or overvalued for some years.

This means that it is probably very difficult to predict accurately the direction of market movements over the short run.

Past Market Movements: Trends Not Consistent

Examination of Past Market Movements of Malaysia KLSE
What can we learn from the history of overall market movements in the Malaysia KLSE?

1.  Generally Upward Trend
2.  Trends Not Consistent
3.  Irregular Price Patterns
4.  Prices Can Be Very Volatile
5.  Prices Move Volatile Upward
6.  Big Booms Are Irregular

----

2.  Trends Not Consistent
It is very difficult to draw trends to fit stock market movements. 

The main problem is determining the starting point of the trend. 

While it is true that statistical programmes can be used for trend determination, one still has to rely on subjective judgement to determine the beginning and ending point of a trend.  The trend lines shown in charts are drawn based on the best available projected knowledge.

Past Market Movements: Generally Upward Trend

Examination of Past Market Movements of Malaysia KLSE
What can we learn from the history of overall market movements in the Malaysia KLSE?

1. Generally Upward Trend

2. Trends Not Consistent
3. Irregular Price Patterns
4. Prices Can Be Very Volatile
5. Prices Move Volatile Upward
6. Big Booms Are Irregular

-----


1.  Generally Upward Trend

We can see that although there are peaks and troughs, the overall tendency is for the market to be moving upwards.  From 1970 to 1981, the Malaysian market was growing at an annual rate of about 12% (Singapore market 15%).  From 1981 to 1987, the trend appears to be much less, around 4% per annum for the Malaysian market (6% for Singapore market).  The reason for the slowdown in the growth trend from 1981 to 1987 was deflation and the negative growth experienced during the first half of the Eighties. 

These trend lines may be regarded as equivalent to the intrinsic value of an individual share for they mark the inherent value of the market as a whole.  The market seems to fluctuate around these trend lines. 

In the future, the upward tendency of the market is most likely to continue although we are not sure what will be the actual growth rate. 

However, by projecting a trend which is conservatively drawn we can have some idea where the market is heading.  If we buy our shares when the market is at a reasonable level (that is when the index is around the trend line or below), we can rely on the long term rising trend to obtain our gain from the market. 

Unless we buy shares near the top of the peaks, we should be able to profit from buying shares after a few years.  It is therefore important to go for the long run.

Past Market Movements: Malaysia KLSE

By using an index, we can very quickly have an idea of how much the market has moved within a noted period. 

For example, if the index stood at 800 and it is now standing at 1200, we can say that the market as a whole has moved up 50%  [(1200-800) divided by 800)].

Click: http://finance.yahoo.com/echarts?s=%5EKLSE#symbol=%5EKLSE;range=my
This figure shows graphically the movements of the KLSE for the years 1999 to 2009. 

What can we learn from the history of the overall market movements in the Malaysia stock market?

RM149 billion KLSE losses in 5 days

RM149 billion KLSE losses in 5 days

http://blog.limkitsiang.com/2007/03/06/rm149-billion-klse-losses-in-5-days-pmministers-not-stock-market-consultants/

What is a stock market index?

A stock market index is a measure of the average price level of the shares traded in the market.  Its use is analogous to the use of degree of celcius to measure the temperature.  It is constructed by comparing the current price of a sample of shares with their prices at some earlier date. 

The organization which is setting up the index (e.g. KLSE) has to make two decisions regarding the design of the index. 

First, what are the companies to be included in the index?

Second, what is to be the starting point of the index?

Both decisions would involve a certain degree of compromise.

In general, 30 companies is a good compromise to represent the actual situation at the stock market.  KLSE Indices have the starting date of 1st January 1970.  The KLSE Indices are given the base value of 100 as at 1st January 1970. 

There are various ways of computing an index but the easiest way to understand is probably the one using the market value of the companies included in the index. 

The KLSE Industrial Index has a based value of 100 at 1st of January 1970.  It stood at 700 at the end of August 1988.  This means that the market value of the companies chosen for the index had increased their total value by 600 per cent since 1970 (an average annual increase of 11.5 per cent). 

It is worthwhile to remember how indices are calculated and remind ourselves how much the market has gone up in the bull run.  When the market is next in a manic phase, we have to ask ourselves if it is feasible for the market to continue its performance in the future.

Click:
http://finance.yahoo.com/echarts?s=%5EKLSE#symbol=%5EKLSE;range=my
FTSE Bursa Malaysia KLCI Index (^KLSE)

http://blog.limkitsiang.com/2007/03/06/rm149-billion-klse-losses-in-5-days-pmministers-not-stock-market-consultants/
RM149 billion KLSE losses in 5 days