Basics, Informative, Option Strategies, Options, Options strategies, Portfolio Management, Using MarketXLS

How to hedge a drop in S&P 500 Using MarketXLS

With market valuations rising, many investors are concerned about the likelihood of a market crash, which is traditionally defined by losses of more than 20% over a 12-month period. While these crashes are rare, prudent investors have hedging techniques in place to protect themselves from unexpected losses. A hedge is a strategy for reducing the risks associated with an investment. A hedge is an instrument or method that increases in value when the value of your portfolio decreases. As a result, the hedging profit covers part or all of the portfolio’s losses.

Rather than focusing on specific risks, most investors prefer to protect their entire stock portfolio from market risk. As a result, investors hedge at the portfolio level, normally with a market index-related instrument.

The Long Put Position

The simplest, but also most expensive hedge is a long-put position. Puts on S&P 500 ETFs or S&P futures are available to investors. Typically, an option with a strike price of 5 to 10% below the current market price is used. These options will be less expensive, but they will not protect the portfolio from the initial 5% to 10% drop in the index. 

One issue with the put option strategy is that during a large downturn, option premiums are inflated due to increased volatility. Basically, what that means is that an investor could be on the right track but still lose money. Selling short is usually not a good idea for someone who is merely dabbling in the markets.

Buying just before a fall is the first essential to making the short approach work. Shorting and buying puts offer the advantage of allowing investors to profit directly on a dip in the S&P 500. Unfortunately, this puts them at risk of losing money if the S&P 500 rises, which it generally does. Another important aspect of successful shorting is getting out promptly when the market rises.

How Can MarketXLS Help?

MarketXLS has templates readily available for lightning-fast analysis. Here’s a snapshot of the template 

Long Put Strategy

The cells in which the user has to enter his inputs have been highlighted in yellow – Stock Ticker, Expiry Date, Strike price, and the plot gap. 

And that is all!

The template will automatically show you the net cash flow and the payoff profile even before you blink your eye. 

Net Payoff Matrix

The Net Payoff table helps the user to observe the potential profit/loss at different expiry levels along with the Net Payoff Diagram for a better understanding of the strategy implementation. The table contains the Net Payoff of the Strategy at different expiry prices. It also shows the maximum loss and maximum profit that you can make based on the data inputs given by you. 

To learn more, you can view the video on the Long Put Option strategy at https://www.youtube.com/watch?v=hNH61BrIpsE 

The Covered Call –

A covered call is a financial transaction in which an investor sells call options on his assets and earns an option premium. This is mainly done by investors who hold shares for a long period but are skeptical about the price movement in the short run. Instead of depending only on the rise in the value of shares, investors make use of it by selling call options on their underlying assets. It’s like renting out an asset. A trader who doesn’t own stocks can also leverage this strategy. He can buy stocks at a current price and write off options on the stocks. One can also sell options without having them just like shorting stocks. This is called writing. However, there are certain things that need to be looked into while using this strategy. The approach will also vary with the goals of a trader

Before getting into a trade

  • Stock types: This strategy works best with stable stocks. As long as the beta is 1 or less than 1 you are good to go. Because one doesn’t know, a stock may plummet to 0.
    • Volatility: A stock can be stable but the volatility in the market can drive the best of stocks crazy.
    • Trader’s attitude: Knowing what one wants from trade is equally important. An investor might hold a stock very dear and only look to earn from a premium. But a trader might want to gain from both intrinsic and extrinsic values.

These are some of the factors a trader can look for before jumping in with this strategy. However, after the trades are executed the adjusting of options varies with the attitude of a trader. An investor should only get into a trade if he anticipates it to go down so that he gets to keep his shares.

How Can MarketXLS Help –

MarketXLS has templates readily available for lightning-fast analysis. Here’s a snapshot of the template

 

The cells in which the user has to enter his inputs have been highlighted in yellow – Stock Ticker, Expiry Date and the Strike price.

And that is all!

The template will automatically show you the net cash flow and the payoff profile even before you blink your eye.


The Net Payoff table helps the user to observe the potential profit/loss at different expiry levels along with the Net Payoff Diagram for better understanding of the strategy implementation. The table contains the Net Payoff of the Strategy at different expiry prices. It also shows the maximum loss and maximum profit that you can make based on the data inputs given by you. 

To learn more, you can view the video on Covered Call Option strategy on https://www.youtube.com/watch?v=E1gWIG8TtAU

Inverse Strategies –

Investing in market-hedged products, which protect against specific negative risks, is another alternative for investors who anticipate a market meltdown. There are a variety of these investments available, with inverse exchange-traded funds (ETFs) and leveraged inverse ETFs being two of the most well-known. AdvisorShares Ranger Equity Bear ETF (NYSEARCA: HDGE) and ProShares UltraShort NASDAQ Biotechnology ETF are two examples. These funds take an active inverse market position in the hope of profiting from a market correction or disaster. Short-side protection is taken a step further with leveraged inverse ETFs, which use leverage to boost gains from short-selling positions. These inverse funds are designed for instances where a market fall could result in significant losses.

Selling Calls –

Selling call options is a reversal method for buying put options to safeguard against a market fall. When selling call options, a seller anticipates a drop in the price of a security and looks for a buyer prepared to acquire the call option in exchange for the right to buy the security at a certain price. The buyer’s acquisition of the security at a higher price than the seller expects it to be valued in the trading market helps the seller of the call option. Call options, like put options, are exchanged for specific assets or indexes. More elaborate call option selling techniques can be created to simulate and protect specific investment positions.

MarketXLS –

MarketXLS has about one hundred templates to save you time. Whether it is any option strategy or a valuation model, we have got you covered. We add new templates all the time and they are all available with your MarketXLS subscription.

Feel free to experiment at https://marketxls.com/marketxls-templates

 

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Black scholes model
Calculators, Option Strategies, Options, Options strategies, Others, Using MarketXLS

How Are Options Priced?

MarketXLS offers you simple commands to fetch historical and live option prices, but have you wondered how options contracts are priced?

Any option’s premium consists of two components: the contract’s intrinsic and extrinsic value. The intrinsic value signifies the difference between the strike price of an option and the current market price of the underlying instrument. For a call option, the intrinsic value is the current price – the strike price, and for a put option, it is the strike price – the current price.

The extrinsic value consists of several factors such as time to expiration, implied volatility, interest rates, and dividend yields, among others. In other words, any premium over intrinsic value is said to form the extrinsic value. The premium is what an investor is willing to pay above the intrinsic value in the hope that the value of the contract increases due to changing market conditions.

Because of the involvement of several factors in the option premium, calculating the premium is a challenging task and is accomplished with the help of mathematical models. Several models are used in practice, like the Black-Scholes model, Heston Model, Morton Framework, etc. However, one of the most commonly used models is the Black-Scholes model.

The Black Scholes Model –

The Black Scholes model assumes no-arbitrage pricing for the options contracts and uses five key inputs to derive the option price. These inputs are namely:

  1. Strike price,
  2. Current price of underlying,
  3. Interest Rate,
  4. Implied Volatility, and
  5. Time to expiry

 

For a Call option, the option price is derived using.Black Scholes ModelC = call option price

N = normal distribution

St = Current price of the asset

K = strike price

r = risk-free interest rate

t = time to maturity

𝜎 = implied volatility of the asset

Fortunately, you don’t have to do this calculation yourself. Instead, MarketXLS give you predefined functions that you can directly run in excel to get the output.

But does it mean that actual market prices are always equal to the value derived from the BSM? Sadly, No. The BSM model is based on certain assumptions which may or may not hold in the real world, leading to a mismatch between the values derived from the BSM and market values.

These assumptions are as follows:

  1. Short term interest rates and volatility are constant
  2. There are no transaction costs associated with buying or selling options
  3. The options in consideration are European
  4. The returns of the underlying stock are normally distributed
  5. The markets are perfectly liquid

The Bottom Line –

Due to the impractical nature of these assumptions, market participants often notice huge differences between the values derived from BSM and actual market values. These differences are often driven by changing interest rate and volatility assumptions and supply and demand equations. However, the value derived from the BSM model can be used as a starting point while analyzing options.

Options trading gives you great advantages over trading any other kind of financial instrument. However, with the leverage that the options provide also comes with risks. Use MarketXLS Option Templates along with your own Excel calculations and real-time options data to get an advantage in the markets.
The Black Scholes Option model tries to calculate the fair value of the Option Contract.
In MarketXLS you can calculate the model value in a very simple way.
=BlackScholesOptionModelValue(“Option Symbol”) this function will return the value as per the model based on the dividend yield on the underlying asset, historical 7 trading day volatility, and an expected rate of return of 5%.
In most cases, you would notice that the value this function returns for an option contract will be pretty close to the last price of the option in the market.If you would like to use your assumptions of volatility and rate of return the function below will allow you to get the calculation Black Scholes Options Model Value.
Check out MarketXLS Plans here.
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Options Mistakes
Informative, Option Strategies, Options, Options strategies, Using MarketXLS

Use of Options to Hedge Market Risk

A hedge is a risk-mitigation strategy for investors. A hedge is an instrument or method that increases in value when the value of your portfolio decreases. As a result, the hedging profit covers part or all of the portfolio’s losses. Several strategies are available to hedge different risks. Furthermore, there are a variety of ways to mitigate these hazards. Some portfolio hedging strategies protect against specific risks, while others protect against a wide range of threats. In this post, we’ll look at how to protect stock portfolios from market risks, including volatility and capital loss. On the other hand, investors can use portfolio hedging to protect against inflation, currency risk, interest rate risk, and duration risk.

There are many different ways of hedging stocks. We will look at five approaches using options. Options hedging is cheaper as it is a leveraged product. Deep in the money options which have an intrinsic value at the time of purchase are priced higher. Options that are a long way out of the money are priced pretty low, as there is little chance they will expire with any intrinsic value. The objective of an options hedging is to reduce the impact of a market decline on a portfolio. It can be accomplished in various ways, including using only one option or a mix of two or three.

Portfolio managers routinely utilize these five option hedging strategies listed below to reduce risk – 

1. Long Put Position

A long-put position is the simplest but the most expensive option to hedge portfolio downside due to market risk. Usually, an investor will purchase an option with a 5 or 10% strike price below the current market price for a time duration for which excessive market volatility is expected. These options will be cheaper but will not protect the portfolio against the first 5 or 10% that the index declines. The longer the put option duration, the higher premium the investor must pay.

2. Collar

A collar involves simultaneously buying a put option and selling a call option. By selling a call option, the premium received covers a part of the cost of the put option. Both options’ duration needs to be the same, while the strike price could differ according to market expectations. The trade-off is that the upside of the portfolio will be capped. If the index rises above the strike price of the call option, the call option will result in losses. Gains in the portfolio will offset these. This strategy is usually used by professional traders when they expect high volatility in the market for a short period. This cost-effective strategy provides a perfect hedge, but all upside gains will be washed in bull markets.

3. Put Spread

A Put spread strategy is used when the user is confident that the markets will be rangebound within a certain upper and lower limit. A put spread entails going long on a put option and shorting another put position with a different strike price. For example, a portfolio manager can buy a put with a strike price at 95% of the spot price and sell a put with an 85% strike. Again, the sale of the put will offset part of the cost of the bought put. In this example, the strategy would only hedge the portfolio while the market falls from 95% to 85% of the original strike. If the spot price falls below the lower strike, gains on the long put will be offset by losses on the shot put.

4. Fence

A fence is basically a combination of a collar strategy and a put spread strategy. In this strategy, an investor goes long on a put with a strike price below the current market level and sells both a put option with a lower strike price and a call option with a much higher strike price. The result is a low-cost structure that protects the portfolio from downside and at the same time allows for a limited upside.

5. Covered Call

In a covered call strategy, an investor sells out of the money call options against a long equity position. It doesn’t reduce downside risk, but the premium earned does offset potential losses. This strategy is more effective on individual stocks and hence more popular for an undiversified portfolio. Losses on the option position offset a certain amount of gains on the equity position if the stock price climbs over the strike price.

Selecting The Suitable Hedge Strategy For Your Portfolio –

There is no sure-shot way to choose the best available options when hedging stocks. However, the user can consider the pros and cons of the available strategies and make an informed choice. Several factors need to be considered while evaluating alternatives. The first decision will be to decide how much the portfolio needs to be hedged. If the portfolio is well-diversified, the entire portfolio is already hedged to an extent. However, maintaining a beta value of 1 at all times is not possible. In that case, there would be a requirement to hedge it.

On the other hand, if all of your wealth is in equities, at least 50% of hedging might be required. The user also needs to consider the portfolio assets and determine which market indices it most closely resembles. Calculation of the average beta of all stocks is also required. A larger hedge is required for a higher beta. Also worth considering is how much upside the user is prepared to forfeit. Selling of call options leads to a reduction in the cost of a hedge but at the same time limits gains.

After deciding upon the type of hedge that would make sense, one should also look at some indicative prices to determine how appropriate strategies will cost. For S&P options, a list of liquid options contracts can be pulled out any time using inbuilt MarketXLS functions. The user should have a particular view of the market (bullish, bearish, rangebound), evaluate different strategies in terms of cost and protection, and finally execute the strategy.

MarketXLS has in-built templates that aid to analyze all these strategies and choose which one suits best for your risk appetite and market view and execute the same.

You can go through the MarketXLS template (https://marketxls.com/marketxls-templates) &

MarketXLS Youtube Channel (https://www.youtube.com/channel/UC6pNfl-Re61QbCkjRb-6mYg/videos) to further understand all these strategies.

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Options Strategy
Basics, Getting Started, Guru Strategies, Option Strategies, Options, Options strategies, Technical analysis, Using MarketXLS

Option Strategies For Professional Traders

Options Strategy Trading – Sounds Heavy, Isn’t it? Well, don’t worry, we are here to help you in this regard. It involves a combination of buying and selling calls and put options of different strike prices & expiry dates in order to limit the losses and have a great return on your investment.

Professional traders do perform pre-defined option strategies to earn decent returns on a recurring basis and a few handy tools make their life way easier. MarketXLS provide such tools and templates which bring the best for retailers at very competitive prices and on the software on which we are the most equipped, i.e., Excel.

In this article, we will explain a couple of strategies followed by professional traders and how marketXLS provides the resources to make it pretty easy for even a novice trader.

Strategies used when assumption being Bullish on the Underlying asset:

1. Bull Call Spread –

It consists of buying a call option at the money strike price and at the same time selling a call option with a higher strike price which is out of the money. Both the call options should be of the same underlying asset and expiry date. It is a limited profit and limited risk strategy used by professional traders. They aim to generate a couple of percentage returns on their capital every month by pursuing this strategy. MarketXLS has a built template for this particular strategy which lets you analyze and choose the best possible return.

Template Link: https://marketxls.com/template/bull-call-spread-option-strategy-2

Video Link on how to use this template: https://www.youtube.com/watch?v=9rinJL4eqvs

Blog explaining details: https://marketxls.com/bull-call-spread-option-strategy

2. Call Ratio Back Spread –

It consists of selling In the Money call option and buying Out of the Money call option of the same underlying asset and expiry date in a defined ratio.  It is a unlimited profit and limited risk strategy used by the professional traders. Whenever they are bullish on any underlying asset, they pursue this strategy to have a chance of gaining big with limited risk. Here in marketxls, we have built template which provides easier way to simulate and execute the strategy. 

Template Link: https://marketxls.com/template/call-ratio-back-spread

Video Link on how to use: https://www.youtube.com/watch?v=edLMRFmpvkQ

Strategies used when assumption being Bullish on the Underlying asset:

1. Bear Put Spread –

It consists of buying a put option with at the money strike price and at the same time selling a put option with a lower strike price which is out of the money. Both the put options should be of the same underlying asset and expiry date. It is a limited profit and limited risk strategy used by the professional traders. 

Template Link: https://marketxls.com/template/bear-put-spread-option-strategy-2

Video Link on how to use: https://www.youtube.com/watch?v=e6eeIr7AFh0

2. Put Back Ratio Spread –

 It consists of selling In the Money put option and buying Out of the Money put option of the same underlying asset and expiry date in a defined ratio.  It is a unlimited profit and limited risk strategy used by the professional traders. Whenever they are bearish on any underlying asset, they pursue this strategy to have a chance of gaining big with limited risk. Here in marketxls, we have built template which provides easier way to simulate and execute the strategy. 

Template Link: https://marketxls.com/template/put-ratio-back-spread

Video Link on how to use: https://www.youtube.com/watch?v=igHTpiZNgUQ

Strategies used when assumption being Sideways on the Underlying asset:

1. Iron Condor –

 It is a combination of Bull Put Spread and Bear Call Spread strategies which consists of selling out of the money call and put options and buying deeper out of the money call and put options of the same underlying asset and expiry date. It is a limited profit and limited risk strategy. Whenever professional traders feel that there will be non-directional moves in the underlying asset, they execute this strategy to get return on their investment. MarketXLS provides the ready-made template for this which aids in analysing and executing traders in much easier manner. 

Template Link: https://marketxls.com/template/iron-condor-option-strategy

Video Link on how to use: https://www.youtube.com/watch?v=hyVGFduCQU8

Bottom Line –

There are a lot of other option strategies like Straddles, Strangles, Calendar Spread, Ladders, and many more which are used by the traders and hedge funds to earn a return on their investments. MarketXLS has in-built templates which aid to analyze all these strategies and choose which one suits best for your risk appetite and market view and execute the same.

You can go through the MarketXLS template (https://marketxls.com/marketxls-templates) and MarketXLS Youtube Channel (https://www.youtube.com/channel/UC6pNfl-Re61QbCkjRb-6mYg/videos) to further understand all these strategies. 

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Basics, Informative, Option Strategies, Options, Options strategies, Stocks, Technical analysis

Common Mistakes In Options Trading And How To Avoid Them

Options trading can be very profitable if done right. However, we often hear traders losing a lot of money while trading in options due to some common mistakes. Because of this, we see many traders sticking to the delivery-based style of investing/trading and staying away from options.  But Why?

Let us look at the common mistakes that traders do in trading options:

1. Ignoring The Greeks –

Options are derivative instruments whose value is derived from the underlier. Option Greeks are financial measures of the sensitivity of an option’s price to its underlying determining parameters, such as volatility or the price of the underlying asset. The Greeks are utilized in the analysis of an options portfolio and in a sensitivity analysis. Greeks are in general difficult to understand for novice traders and often ignored, which leads to losses for the traders.

2. Buying Deep Out Of The Money (OTM) Calls/Puts –

Many times, we observe traders buying deep OTM calls/puts just because they’re very cheap and it allows the traders to buy a larger quantity. However, many beginner traders do not realize that 90% of the options expire worth, and thus, buying deep OTM calls/puts will most likely result in a loss.

3. Option Selling Without Hedge –

Buying options involves limited risk as the option buyer’s maximum loss is only limited to the premium paid. When it comes to option selling, the losses are unlimited and not fixed. Even though option selling is probabilistically more profitable than options buying, even a one-off loss can be huge enough to wipe off one’s entire wealth, maybe even more. Hence, option selling without a hedge involves high risks.

4. Value At Risk –

Traders at times, enter into trade positions without calculating the value at risk (VAR). Not understanding the leverage correctly and taking improper position sizing can result in huge losses if the view goes in the opposite direction of the trade taken.

5. Letting Emotions Do The Trading –

Options trading involves high volatility and we have often seen the best traders making losses because their emotions kicked in the trade. Greed and Fear are a trader’s worst enemies and they often lead to heavy losses because we let the emotions take control of our trading decisions.

Well, mistakes often have corrective actions to mitigate them, and options traders can avoid losses and make options trading a profitable journey. Want to know how? Let’s have a look below:

1. Develop A Trading System –

Having a trading system helps a trader remain disciplined. A trader should be aware of his potential profit/loss even before he enters the trade. This will remove the emotional aspect of the trade.

2. Hedge Your Bets –

A trade can either go right or wrong. When it goes right, we get good profits. But when it goes the trade overnight risk of carrying forward the position for a longer time frame.

3. Build Strategies –

The beauty of options trading is that an option trader can make a profit in a bull market, bear market, and even a sideways market. How?! By building options strategies, just like we offer a wide range of templates at MarketXLS! Do check them out – https://marketxls.com/marketxls-templates

4. Understand Your Trading Style –

Every trader is different and has a different style of trading. It is thus important for a trader to understand his/her trading style and not get carried away by what other traders are doing. Knowing when to trade is important but knowing when not to take a trade is equally important too.

Bottom Line –

We hope that this article clarified the risks and strategies to avoid those risks for you.

To further ease out your job with options trading, we suggest you use MarketXLS templates for your portfolio management which will provide you with extended excel functionalities to fetch real-time options data into your excel sheet.

Book a demo now – https://marketxls.com/book-demo

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Image Credit: www.istockphoto.com
Basics

Options Trading for Passive Income

In our fast-pacing world, time is money. We all have our set ways to generate a daily stream of income for a livelihood. While our source of livelihood consumes the majority of our time, commitment, and energy, a few extra bucks on the side never hurt. Options trading is a great source of passive income for investors and beginners in the trading world. 

On one hand, Active trading deems our entire attention, options trading serves to earn passive income without constant indulgence. Let’s move on to a few strategies of options trading that we can use as a source of passive income.

 

Covered Calls

The most basic technique for options trading is the covered call. It involves minimum risk and consistent gains without having to invest your energy on a daily basis to maintain your portfolio.

When a person buys a few stocks in his/her name, they can further go ahead and sell the calls against the stock they bought. One option comprises 100 shares; hence, it is advised to buy stocks in multiples of hundreds if you want to sell multiple calls. Based on the number of stocks you buy; you can sell calls for a premium (which will be your difference between the value of the stock at the time of buying and selling) with a strike price that is slightly higher than the price you anticipate for these shares at option expiration. Your profit per option will be one hundred (the number of shares per option) multiplied by the premium of the call.

Image Credit: www.investopedia.com

 

This strategy involves minimal risk as you will always at least make a profit on the premium value of your call. Whereas, there is a slight setback to the covered call strategy in cases where the price of the stock dramatically rises. In this scenario, the buyer will exercise the options and you will end up making less profit on the premium value as compared to the value of the stock if you sold it in the open market.

Covered calls require limited attention as the most you need to do is monitor the value of the stock on a daily basis without investing too much energy. They are free of stock price fluctuation-related risks. Another great benefit of the covered call strategy as a source of passive income is its flexibility. If the buyer does not exercise his calls before the expiration date, you still own the share of the stock which is resalable in the open market as new calls and you can generate additional passive income with no additional effort on your hand.

 

Selling Put Options

If you’re an active investor who is looking for a side hustle via options trading, you can arrange to buy new stocks in the future at a lower price by selling put options. CEO of Berkshire Hathaway, Warren Buffet is well-renowned to make huge gains out of selling put options. While this strategy bears out of a desire to buy shares in the future, let’s take a deeper look at its utility in options trading for a passive income.

Selling put options is a light-hearted options trading strategy that can be utilized to generate a good amount of passive income. Make sure to choose the stock you want to purchase and set the strike price of the option equal to the price you are looking forward to buying the stock for. Once you do that, you only need to sell a put option for the stock.

Image Credit: www.investopedia.com

 

This will not only help you to generate income through the premium at which you sold the put option but also allows you time till the buyer chooses to exercise the stock. As soon as the buyer exercises the option, you need to buy the new stocks you chose to purchase in the first place to have both the premium made by selling the put option and the additional stocks bought with limited effort. 

Another added advantage of this technique is that you can still keep the premium even if the put option remains not exercised at expiration. It also allows you to sell new put options for an additional premium without any additional input to generate a passive income. 

 

The Bottom Line

While covered calls and selling put options serve as safe option trading techniques to generate a passive income. We can also look at Iron Condors and defined risk spreads to determine how we can sell time to make a monthly passive income. These techniques are a little more complicated and would require pre-learning before diving with full force into options trading with them. 

Selling and buying options provide an excellent opportunity for people with tight schedules to sell yearly or bi-yearly on calls and maintain an influx of cashflow with no extra hard work and downside risk.

To further ease out your job with options trading, we suggest you use MarketXLS templates for your portfolio management which will provide you with extended excel functionalities to fetch real-time options data into your excel sheet.

We have specific templates created just to cater to the covered call and selling put option strategies.

Head to the website for more info on the various screeners and templates we have with us at MarketXLS: https://marketxls.com/

Refer to this link, for a demo session with MarketXLS: https://calendly.com/marketxls-sales/marketxls-demo-clone

Also, find the Pricing link attached: https://marketxls.com/pricing

 

References

https://tradeveda.com/

www.investopedia.com

 

 

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Portfolio Comparison Template
Basics

Portfolio Comparison Template

 

Investing can seem like a daunting task. A few challenges faced by investors are information overload, limited capital, unknown risks, not getting expert help, etc. 

With the unique template offered by MarketXLS, investors can gauge their investment styles and compare their portfolios with the standard portfolios made by industry experts which represent a certain risk-reward ratio. We have designed this template to help the investor in identifying their investment style by assigning them a risk-taking ability measure based on their profile analysis and a behavioural loss tolerance sheet. Based on the results, MarketXLS suggests recommended portfolios. And that’s not all. Next, the investors can choose a Model portfolio to compare it with their own portfolio on various parameters, observe the differences and help them take corrective action accordingly if required.

 

How It Works

The template consists of two sections:

> Investor Profile (Active File) – Based on a sample of questions we gauge the Investor’s risk-taking ability and score it. 

The scoring is done from 1-4, where 1 means most risk-averse and 4 being the risk-taker.

Comparison Sheet – Based on the risk-taking ability of the investor, we suggest some default portfolios that will suit the investor. He/she can compare his/her portfolio with our suggested ones on various parameters.

Investor’s Risk-Taking Ability

This picture is a representation of the certain factors that are taken into account in order to assess an Investor’s Risk-Taking Ability.

As per the investor’s risk-taking ability, above is a representation of how default stocks and portfolios are suggested. The box above shows the default stocks and portfolio parameters provided by MarketXLS and the box below the top box shows the stocks owned by the investor and an assessment of his/her portfolio’s parameters.

 

Portfolio Parameters Overview

  1. Sortino Ratio

The Sortino ratio takes an asset or portfolio’s return and subtracts the risk-free rate, and then divides that amount by the asset’s downside deviation

The higher the sortino ratio, the better. If your portfolio’s Sortino ratio is better than the Sortino ratio provided by the default portfolio, then your portfolio may outperform the default portfolio.

 

  1. Value at risk

Value at risk is a measure of the risk of loss for investments. It estimates how much a set of investments might lose, given normal market conditions, in a set time period such as a day.

Risk managers use VaR to measure and control the level of risk exposure.

 

  1. Sharpe Ratio

The Sharpe ratio is a measure of risk-adjusted return. It describes how much excess return you receive for the volatility of holding a riskier asset. The higher the sharpe ratio, the better the portfolio.

 

  1. Portfolio Beta

Portfolio beta describes the relative volatility of an individual securities portfolio, taken as a whole, as measured by the individual stock betas of the securities making it up. The lower the portfolio beta, the better your portfolio.

 

  1. Portfolio Volatility

Portfolio volatility is a measure of portfolio risk, meaning a portfolio’s tendency to deviate from its mean return. A portfolio is made up of individual positions, each with its own volatility measures. These individual variations, when combined, create a single measure of portfolio volatility. The lower the portfolio volatility, the better.

 

6.1-Year return

An annual or annualized return is a measure of how much an investment has increased on average each year, during a specific time period. … An annual return can be determined for a variety of assets, including stocks, bonds, mutual funds, ETFs, commodities, and certain derivatives.

 

Here’s a link where you can find default portfolios:http://www.lazyportfolioetf.com/allocation/

 

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Fibonacci Ratio
Basics, Charts, Informative, Option Strategies, Options, Options strategies, Technical analysis, Technical Queries

Trading Using The Fibonacci Retracement Strategy

What Is Fibonacci Retracement?

Leonardo Piscano was an Italian mathematician from Pisa. He was nicknamed Fibonacci and he found an interesting pattern in a certain set of numbers. That pattern or sequence is known as the Fibonacci sequence. In the Fibonacci sequence of numbers, after 0 and 1, each number is the sum of the two prior numbers. Each number is around 1.618 times greater than the previous number. This value of 1.618 is called phi or the golden ratio. This ratio is visible in a lot of natural occurrences in the world. It has been observed in the Mona Lisa as well. The inverse of this number 0.618 is also used quite frequently in trading.
The numbers used in Fibonacci retracement are not the numbers from the sequence but they are derived from the mathematical relationship between the numbers in the sequence.

The basis of the “golden” Fibonacci ratio of 61.8% comes from dividing a number in the Fibonacci series by the number that follows it. For example – 89/144 = 0.618.

The 38.2 % ratio is obtained by dividing a number in the Fibonacci series by the number which is 2 places to the right. For example – 89/233 = 0.3819

The 23.6% ratio is derived from dividing a number in the Fibonacci series by the number three places to the right. For example: 89/377 = 0.2360.

The Fibonacci Retracement Strategy –

A retracement is a technical term used to identify a minor pullback or change in the direction of a financial instrument, such as a stock or index. Retracements are temporary in nature and do not indicate a shift in the larger trend. Fibonacci retracement means identifying levels using the Fibonacci ratios to determine where to take a position for trading.
The levels are placed using the Fibonacci retracement tool by dragging it across the lowest point of a price on the chart up to the highest point of the price if it’s an uptrend.
If it’s a downtrend, we drag the tool from the highest point to the lowest point of the chart to map the levels.
Fibonacci retracement levels are depicted by taking high and low points on a chart and marking the key Fibonacci ratios of 23.6%, 38.2%, and 61.8% horizontally to produce a grid. These horizontal lines are used to identify possible price reversal points. It is often used as a part of a trend trading strategy.
For example – if a certain stock is moving in a downtrend and hits the Fibonacci 0 level, traders assume that it will rally a bit up to the next Fibonacci level and hence they take a long position until the 0.382 level or the 0.5 level. When the stock reaches the desired level, traders either book profit or take a short position to earn along with the trend.

Fibonacci Retracement Strategy Chart

Here in the above image, you can see that the stock fell from point A(1 level) to point B
(0 levels). At point B a trader usually goes long till the price reaches the next Fibonacci level at 0.382 and then the price eventually settles down and continues to go along the trend.

There can also be a trend reversal if the price breaks the 0.5 mark. Traders love the 0.618 mark as it can be a strong indicator of trend reversal and hence they take suitable positions once the price nears the 61.8% mark.

Bottom Line –

Fibonacci retracement is about riding the trend. There is another strategy traders use called the Fibonacci extension which is used as an indicator of trend reversal levels.
Traders use the Fibonacci retracement strategy along with other technical indicators to make a decision. The Fibonacci retracement on its own is not a very good indicator of the price levels, but it can be very powerful once used with other indicators.
The last thing to note is that the time period can be very helpful while using this strategy, using it on a daily chart might not be as useful as using it on a weekly chart.

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