Protecting Your Investment Portfolio

source: www.thisismoney.co.uk

It might be timely to start thinking about protecting your investment portfolio, particularly with storm clouds gathering.

Nobody knows for certain where this market is heading. While the fundamentals aren't that good, it’s still not enough for us to know with absolute certainty where this market is going next.

Central banks do indeed influence market trends, both directly and indirectly, but knowing when and the extent of their future actions is, in reality, educated guess work.

However, what we can be absolutely sure of is that markets are and always will be volatile. Over the past century, 5 percent falls typically happened three times a year. Corrections of 10 to 15 percent are less frequent, usually occurring once in a year, or in a two year period and 20 percent bear falls usually occur once every five years.

Ironically, volatility for a trader can be his best friend, but it can also be his worst enemy. If you understand how to make volatility your best friend then you will not fear volatile markets, but rather see them as an opportunity.

Just like the skilful sailor can harness the energy of the wind, irrespective of what direction it is blowing by orientating the direction of his sails, thereby trapping the wind and creating motion, so too can the trader use volatility in their trades to create profits. You may need to deploy different trading strategies to benefit from volatile markets, but just because the market flip flops from one direction to another doesn't mean that you can not profit from the volatility.

The wind maybe blowing foul but you can still trap the energy by moving your sails.

There's no ideal position to orientate your sails. If you want to keep moving you'll need to position your sails according to the current wind direction. Likewise, in trading a strategy that worked once may not be profitable in the future. In other words, trading strategies need to be flexible (flexible thinking)

Have you ever wandered why a twig can survive a gale-force storm and a supertanker sometimes ends up smashed to pieces? One structure is fixed and the other is flexible.

Fight an irresistible force and you are doomed, but go with it and you may prosper.

Let's look at some ways you can hedge your investments in a volatile market.

The buy and hold strategy, might not be suitable for everyone, whether it is will depend on your investment time frame. If you are approaching retirement in say a few years, you haven't got the luxury of waiting five years for the market to pick-up again, assuming you have been caught out by a 20 percent bear drop against your portfolio of investments.

So what other options are available?

The most obvious one is to remain liquid. Sell some equities and remain on the sideline in cash. In this case you are not really hedging, you are just not participating. Cash is king in a crisis, but in the long term cash is never a good investment strategy. Nobody got rich just holding cash.

Cyclical Investing. This investment strategy involves moving into defensive stocks, such as consumer staples, utilities, insurance, precious metals, healthcare and bonds. In this case, the investor is rotating their portfolio away from cyclical stocks, tech stocks, non staples and diversifying their investments towards sectors that weather better in economic hard times. But again this is not a pure hedge investment strategy.

The investment strategy behind a pure hedge is to protect your investments or even profit from a stock market decline.

Options protective puts. This can be an attractive investment strategy for investors because of their leverage nature. For example you could buy a protective put, if you reckon that the shares in your portfolio are about to decline. If the stock market moves against your portfolio, then you profit from a decline while still retaining your stock and when the bounce back comes, which it usually does if it is a blue chip stock you profit again from the rise. A Tesco (British Supermarket) put option would have been a profitable play. Admittedly, market conditions are tough but could the company (Tesco) recover if it were well managed again. Imagine if Tesco's stock were to flat line for several months and you decide to close your put position. If you hold Tesco stock in your portfolio you have profited from the stock fall and have lost no money. Moreover, with the stock still in your portfolio you are ready placed for a future upturn in the stock, if any.

There are many more complicated hedging methods. Multiple put/call option packages such as bear put spreads and other derivatives such as futures and CFDs are also popular for hedging. These, however, carry significantly more risks and should only be employed by those familiar with them.

Another way of looking at hedging for the conservative investor, with a few years to go before reaching the retirement age, is to see it like an insurance policy. You purchase an insurance policy to insure your house against fire, theft, water damage etc. You hope not to get burgled or your house damaged by fire, but for peace of mind you pay an insurance company a premium to take the problem off your shoulders.

In a similar way, that is why large investment portfolios, particularly when the investor has a short time frame, tends to opt for having their investments fully hedged. It's an insurance policy, which is designed to protect your wealth in a stock market crash.

Clue Is In The Secondary Market

November 15, is likely to be an important date for traders.

Why? It's when the Bank of International Settlements is scheduled to releases its annual progress report on over the counter derivatives transactions. This data is likely to give traders/retail investors a valuable insight into where the market is heading.

The secondary market, or derivatives market is little known, rather mysterious and riddled with complex jargon so I will keep it in layman terms.

Basically, the secondary market is massive in size, it is worth approximately 650 trillion US dollars. To give meaning to that figure the secondary market is worth about 10 times the sum of the economic activity of all the countries in the world in 2013.

But only super capitalised investment banks have access to the secondary market, it is not open to the retail investor. Nevertheless, what happens in the secondary market has a big impact on us downstream. If those high up the food chain mess up on the secondary market we are left moping up the mess. We feel the pain in terms of plunging portfolio values, difficulty in taking money out of the bank, low interest rates on savings and job losses.

The secondary market has grown to such an enormous size in recent times due to leveraging.

What is leveraging?

Imagine we make a horse racing bet, you put 100 USD on the table and if your horse wins I give you 1000 USD dollars. If however, my horse wins you give me a 1000 USD.

So with little money there's the potential to win a lot, 10 times as much as I put on the table if my horse wins. But there is also the potential to lose a lot if I lose the bet.

This is precisely why the commercial banks are taking huge risks on the secondary derivatives market, the potential of making huge profits. How do you think the commercial banks can make a cool five billion dollars of profits every quarter, even in a down market?

They are leveraged up to their eyeballs in the secondary market, which includes mortgage backed securities, default swaps and credit debt obligations. These are derivatives, but for the purpose of keeping it simple I will refer to the whole secondary market as the horse race market.

So the horse race market is worth an absolute fortune, many times bigger than the world's economy and for a few heavyweight participants with deep pockets they have an opportunity to make or lose an absolute fortune in a small space of time. When the banks lose money on the horse race market it has a cascading effect and they are forced to sell like crazy, which causes disruptions to other banks. Then other banks are also forced to sell, it sparks off a chain reaction and the whole thing falls apart very quickly, similarly to the way a house of cards collapses.

This is unfortunately what happened in the 2008 financial crisis, which brought the entire financial system almost to its knees in a short space of time. It was a huge derivatives crash, in the secondary market, especially in mortgage backed securities which then triggered a credit squeeze and the economic recession that followed.

Pretty much everyone has been affected, either directly or indirectly by the financial crisis of 2008. That is why why we need to shed some light on this very important market. The Bank of International Settlements November 15 report will be a clue as to what the central bank will do next in the secondary market. Will the Quantitative Easing, bond purchasing program designed to keep interest rates low, be finally wound down or will QE be ramped up again. Perhaps the central banks might pump more liquidity into the system, they may not call it QE or a bond buying programme, nevertheless, they will find a way if necessary to continue injecting liquidity into the system.

In 2008 there was a major derivatives correction, it wasn't necessarily mortgages, it was mortgage backed securities, default swaps and credit debt obligations that fell apart. Again I will cut all this financial jargon out and just call the whole shebang horse racing bets, as they’re essentially the same thing. In 2008 total horse racing bets amounted to 650 trillion USD, a huge amount, then there was a significant contraction in horse racing bets to the tune of 50 trillion US dollars. Put another way, almost the entire world's GDP was wiped out in the space of just 6 months. Losses due to bad bets. This helps explain why the world economy went through such big problems in 2008 and why economies experienced such a server contraction.

Going back to the previous example of you putting 100 USD on the table and your horse winning, then me giving you 1000 USD dollars. So the notional amount is 1000 US dollars but the gross market value for your horse race is 100 USD.

Well back in 2008 the notional amount dropped by 50 trillion US dollars, that's a massive fall.

How did the central bank, the FED, respond?

The central bank reacted in the second half of 2008 by injecting approx 15 trillion dollars in the gross market value of horse bets.

So in the second half of 2008 notional amount of horse racing bets drops and the central bank stepped in by putting more money on the table and jumping up the gross market value of horse bets.

What happened to the stock market?

It went up and up... banks were able to speculate on the derivatives market, make more horse bets and the goldilocks economy spins on, until the second half of 2011.

Then what happened?

The notional amount of horse racing bets suddenly drops again, this time there is 30 trillion contraction in the total value of horse racing bets. The FED reaction is the same, but this time they put 8 trillion dollars on the table in the gross market value of contracts for horse racing bets and banks start purchasing derivatives again.

Then stockmarket continues its rally again and the goldilocks economy spins on.

So now we are in 2014 and if November 15 reports shows a huge drop in notional amount of horse racing bets..well you can write the bedtime story yourself, just repeat action and the goldilocks economy continues.

Stress Test

The streets were deserted below, as you would expect on a Sunday evening in the City of London. Yet 18 floors above Old Bond Street the lights were burning bright. An indication that some kind of activity was taking place approximately 50 meters above the urban walkways.

The entire 18th floor is home to the European Banking Authority (EBA), which was established in January 2011 in the wake of the financial crisis. The aim of the EBA, in a nut shell, is to prevent another financial crisis occurring by drafting up and enforcing a set of banking rules to ensure the European banking system is fully capitalised. The EBA is a super authority, in that it’s above national regulators. So in the UK's case it presides over the Bank of England. Another opaque organisation also falls with the EBA's jurisdiction, known as Committee of European Banking Supervisors.

EBA's latests stress test on European banks was due out on Sunday, October 26. The idea was to simulate a worse case scenario for the European economy and test whether the banks would be robust enough to withstand the shock.

European Banks were tested on their ability to withstand a 5 percent contraction in European Union (EU) Gross Domestic Product (GDP) by 2016 and a sharp rise in EU unemployment, which shot up to around 13 percent from its current level of 10.1 percent. And of course a bond market crash was thrown into the “doom” equation.

Based on the EBA's simulation, as outlined above, one in five European banks were deemed to be under capitalised and likely to run into trouble, should the EBA's conditions of a worse case scenario become a reality.

British banks performed the best in the stress tests, being the most resilient in Europe and able to withstand the greatest losses and still retain sufficient capital buffers to survive a future financial shock. The EBA calculated that HSBC could weather 43 billion pounds sterling of losses on its banking and trading books over the next three years and still have sufficient capital buffers. RBS, Lloyds and Barclays were judged to be able to withstand losses amounting to around 25 billion pounds sterling. Lloyds was left with the weakest capital position. Under the adverse scenario, the EBA said its capital base would be eroded to 6.2pc, from a starting point of 10.2pc. Nevertheless, a Lloyds spokesman welcomed the results of the test. "This strong position reflects the steps taken by the group's management over the last three years to return its balance sheet to a robust position, and we will continue to use this strong basis to help Britain prosper”, said the spokesman.

“UK banks have significantly built up their equity levels post the crisis after leverage was unearthed as a fundamental flaw with European banks as compared to their US peers”, said Chirantan Barua, an analyst at Bernstein Research. “In fact all the banks today hold the highest level of capital that they have ever carried in 20 years.”

On the other end of the performance scale, Italian Banks have been the hardest hit by the ongoing crisis in the Eurozone. Banca Monte dei Paschi di Siena, the world’s oldest bank,was just one of 25 European bank that failed the EBA latest stress test and needs to recapitalise by 2.1 billion pounds, if it is to weather a storm. The Italian bank has hired UBS and Citigroup to explore its options as the bank considers how to plug the capital hole. “Italian banks need to address their capital shortfalls by forgoing dividend payouts, selling assets and cutting costs even considering some consolidation across the sector”, said Raj Badiani at IHS Global Insight.

Portuguese lender Banco Comercial Portugues also failed the stress test. However, its spokesman claimed that it had raised 2.24 billion pounds sterling of Tier 1 eligible capital by the end of September, which would be enough to cover a 1.14 billion pounds sterling shortfall based on last year’s accounts. A number of Greek banks also failed the stress test.

Below is a complete list of the 25 European banks that were deemed to be under-capitalised to withstand a future financial shock

Eurobank

Monte dei Paschi di Siena

National Bank of Greece

Banca Carige

Cooperative Central Bank

Banco Comercial Português

Bank of Cyprus

Oesterreichischer Volksbanken-Verbund

permanent tsb

Veneto Banca

Banco Popolare

Banca Popolare di Milano

Banca Popolare di Vicenza

Piraeus Bank

Credito Valtellinese

Dexia

Banca Popolare di Sondrio

Hellenic Bank

Münchener Hypothekenbank

AXA Bank Europe

C.R.H. - Caisse de Refinancement de l’Habitat

Banca Popolare dell'Emilia Romagna

Nova Ljubljanska banka

Liberbank

Nova Kreditna Banka Maribor

Commenting on the results, ECB Vice President Vitor Constancio said, “Out of the 25, 12 banks have already taken measures in 2014 that are enough to cover their shortfall.”

While the results are intended to bolster confidence in the European banking system there is some question as to how successful that will actually be.

Playing devils advocate, the worse case scenario simulated by the ECB looks more like the best case scenario. EU unemployed 13 percent and GDP contraction 5 percent, that is assuming a financial crisis similar to 2008 with the economic fallout that ensued. But the policies pursued by the central banks, of loose monetary policy, did little or nothing to eradicate the causes of the last crisis. In fact, it might have created a bigger bubble, a larger wealth gap and a skeptical population. If the pending crash is going to be bigger, then the ECB test results are irrelevant.

Secondly, national supervisors were engaged in their own stress tests. In other words, they were their own judge and jury, and that makes the results of the test biased.

The EBA's previous stress test in 2011 was criticised for being too soft and not taking into account the possibility of a sovereign default.

So could the latest EBA stress test be just lipstick on a pig?

Tech Woes

Hey, what's up with the tech sector these days?

It first started with IBM's latest results, which seemed to stop the music and end the party for the whole sector.

IBM's Q3 results were no cause to pop the champagne bottle. Commenting on the Q3 results, IBM's CEO, Ginni Rometty said, "We saw a marked slowdown in September in client buying behaviour, and our results also point to the unprecedented pace of change in our industry. While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas — cloud, data and analytic, security, social, and mobile — where we continue to shift our business." IBM reported declines in all markets: America's revenue fell 2%, Europe/Middle East/Africa revenue fell 2%, and Asia-Pacific revenue dropped 9%. Management said revenues in its so-called "growth markets" fell 6%, with Brazil, Russia, India, and China revenues falling 7%.

Shares of IBM were down by about 7.3%, or $13.30 per share, in premarket trading.

But its Rometty's choice of words, “unprecedented pace of change in our industry,” that is probably sending cold shivers up the spine of technology investors and funds heavily weighted towards tech stocks. Reading between the lines this might mean that their corporate clients are delaying upgrades and investment in information technology, due to the uncertain economic environment. Overall revenue has fallen by 4% year-over-year to $22.4 billion. "We are disappointed in our performance," said Rometty.

But IBM's fall in revenue for the tech giant isn't just about an ageing dinosaur that can't swing with the times.

SAP, German based software company, is playing mellow tunes too! SAP SE cut its full-year earnings forecast as software customers move to applications delivered through the Internet, a trend which has brought sweeping changes throughout the technology industry.

The world’s largest maker of business-management software said October 20 that its 2014 operating profit excluding some items will be in a range of 5.6 billion euros ($7.1 billion) to 5.8 billion euros. That compared with an earlier projection for as much as 6 billion euros. Third-quarter profit on that basis rose 4.6 percent to 1.36 billion euros, trailing the 1.37 billion-euro average of estimates compiled by Bloomberg.

“SAP has a sticky, high-margin customer base that’s very cash generative,” said Paul Moran, head of research at Aviate Global in London, before the announcement. As it moves those clients to the cloud, “the uncertainty now is what’s going to happen to margins in the next few years.” The shares had lost 13 percent this year through last week, putting it in the bottom third of performers in Germany's 30-stock DAX Index.

No “wow factor” from Google either. Even google is starting to look shaky. Last week, Google reported slower-than-expected revenue growth during the third quarter.

Investors punished the company with a stock sell-off, and now Google shares are trading at $511.17, well below a 52-week high of $604.83. Analysts have noted that searching for advertising, isn’t growing as fast as it used to. In fact it is hasn’t grown so slowly since six years ago, said one analysts.

However, one bright spot is Hewlett-Packard, although it has had a turbulent ride over the past year. Its share price fell from 40 US dollars per share to12 USD per share two years ago, as sluggish growth in personal computers and technology hardware caused its fundamentals to deteriorate. But the company has made a Stella recovery since then and it shares are trading near the 40 USD per share again.

But look deeper into the results and there isn't much to cheer. Instead of effectively turning its business around by investing in new areas, HP’s recovering profits are largely the result of job cuts and share buybacks. While these have boosted earnings and the stock price, HP is still at risk of falling behind in the technology world. So the company has been relying on buybacks and job cuts to do the “heavy lifting.”

HP was hit hard by its reliance on hardware, including personal computers and printers. It has obviously come a long way back, thanks to significant restructuring, but the company’s turnaround is not yet complete. Recently, HP announced that it would lay off 5,000 workers as part of its planned corporate split into two companies. This brings the total number of job cuts under CEO Meg Whitman to 55,000. So there is a caveat in HP's recovery.

Even Amazon’s (the online retailer) Q3 financial results reported larger losses than anticipated . Maybe their cloud customers are coming back to haunt them. The company's biggest internet plays are on Amazons AWS system .They are all dotcoms with little or no revenue. Amazon's latest quarterly financial report shows that the company posted a much larger loss than expected, but it is also projecting 7 to 18 percent revenue growth over the busiest shopping period of the year. Last week's after-hours share losses wipe more than $15 billion off of Amazon's market value. The stock had already been down 13 percent since Amazon's last quarterly results announcement in July, when it also missed targets.

Remember the days when PC gaming drove new upgrades to computers? When was the last time you upgraded your computer? Consumers are hanging on to their PCs for years longer. There's no need to upgrade. The standard amount of RAM in average PC will do you good for years. Why should corporates upgrade their servers? Unless they crash due to some major hardware failure, there is no innovation here either.

So the free spending ways of the tech sector may be over. What we might be seeing is more than price corrections, due to cyclical investing. Sector saturation and a lack of new innovation that drives consumer demand, albeit in tight market conditions might mean that a tech sector correction could be on the cards.

Invisible Hand

It is known that one of the main functions of central banks is to maintain the stability of markets, but does that also extent to directly propping the markets up? Mainstream media and analysts will say of course the central banks don't get directly involved with manipulating the stock market prices, that would amount to interfering with “free” market forces, and that surmounts to rigging the market, that's illegal.

So let's shed some light on the very issue, that mainstream shy away from. Do central banks rig the market?

If we analyse the recent buoyant bounce back in equities, again we see negative divergence in the markets to the maximum, which is when the price of securities go up but the money flow and the fundamentals go in the opposite direction. Negative divergence typically signifies a market top and time to sell.

Recent company results are not bullish, even the most defensive companies, which usually do well in a recession, are reporting poor results. For example, McDonalds profits down 30 percent on a sales slump. It reported a larger-than-expected drop in profits a fortnight ago. Net income for the third quarter fell 30% to $1.07 billion ($1.09 per share) from $1.52 billion ($1.52 per share) a year ago.

“McDonald’s third quarter results reflect a significant decline versus a year ago, with our business and financial performance pressured by a variety of factors – from a higher effective tax rate, to unusual events in the operating environments in APMEA and Europe, to under-performance in the U.S., our largest geographic segment,” said McDonald’s President and Chief Executive Officer Don Thompson. Retailers are also having a challenging time from Walmart in the US, Tesco in the UK and Carrefour in France These are discount retailers and they are all struggling in this extremely challenging business environment. Homebase, the large DIY retailer in the UK, will be closing roughly a quarter of it’s stores by 2018, leading to job losses. Home Retail Group, which owns Homebase and Argos, said that after conducting a review of the DIY chain, it had found “several challenges”, including inconsistent standards across its stores, as well as large stores with low sales. The mainstream like to portray the problem as just a change in fad, a new generation falling out of love with DIY. But the painful reality is that the economy might be going through a reset, the new generation can't find full time stable work, which means they can't secure a mortgage and buy their own property, so they rent. Renters aren't interested in DIY projects and neither are Landlords. This isn't rocket science. 

With respect to “large stores with low sales,” this is a growing problem that retailers are likely to face in the future, particularly those catering for the dwindling middle-class, who are being mashed with job losses, falling real wages and rising taxes. Maybe we will see a rise in the local super discount convenience stores where the consumer frequents several times a week to buy their groceries, a kind of hand to mouth existence.

There's no need to labour the gloom, the question that interests us as traders is what happened to the market on October 15, Wednesday, within just minutes of the market opening the Dow Jones industrial average was down 350 points. Later in the day, after a lot of shocking ebb and flow the Dow bottomed out with a decline of 460 points. It was only in the last hour of trading that the Gods appeared and managed to trim the Dow loss to just 173 points. This happened only after FED Chairman/person Janet Yellen’s private, upbeat remarks about the economy were leaked.

Seasoned traders know that we get storms in October, not just the atmospheric ones, for some reasons stock markets also experience flash crashes. It is no coincidence that crashes and major price corrections occurred in 1929, ’78, ’79, ’87, ’89 and 2008-all were in the month of October. Bizarre but true!

Let's look into this unknown force in the market, nicknamed as the “plunge protection team”, or the “President’s Working Group on Financial Markets,” which is the official name given to the group when it was formed by President Ronald Reagan after the market turbulence of 1989.

So, yes it does exist!

Have you heard about the “Doomsday Book?” The public discovered the existence of Doomsday Book during the AIG trial in Washington, which the government fought to keep secret from the public. A limited audit revealed that 16 trillion US dollar cannot be revealed to the public and yet 4.4 US trillion dollars is only visible on the Fed's balance sheet. More than 11 trillion US dollars remains unaccountable. That is a massive amount of money that is unaudited. Where did it go? What was it used for?

Is the Fed working according to a script in the Doomsday Book?

Certainly an invisible hand rescued the markets during October 15 and it is likely to become a regular occurrence.

Robert Heller, who was a member of the Federal Reserve’s Board of Governors until 1989, proposed just such a rigging as soon as he left the Fed. It would be inappropriate for the government or the central bank to buy or sell IBM or General Motors shares,” Heller wrote. “Instead, the Fed could buy the broad market composites in the futures market.”

So the Fed does indeed prop the markets up. That figures, after all, why would the elites crash a system that serves them so well?

In short, don't gamble on a long term crash, the Gods just won't let it happen.

"Fear Index"

We all know what fear is and can probably identify a market that is in fear mode,we may have even been caught up or caught out by fear in our trading.

Greed and fear are what make markets volatile. But it is the latter human emotion, fear, which causes the markets to rapidly swing, often violently downwards in a short space of time. For some reason, probably going back to prehistoric times when a carnivorous predator looked like it was about to make a meal out of us, fear and responding to danger was a matter of survival. So our brains are hard-wired to respond to fear, it's the fight or flight scenario. Our reaction to fear is almost like a reflex action, we automatically react to it without thinking too much. But it is the lack of thinking it through, analysing the situation that results in an over reaction to fear in the market, which is why traders make losses, selling at a loss-we've all done it.

If excess fear in the markets causes massive selling and crashes, then being able to measure fear, similar to the way a carpenter measures the dimensions of a bookshelf to get a precise fit, would be advantageous to the trader. Being able to gauge the market's fear would flag up an oversold market and provide the trader with buying opportunities. Equally, it might provide us with a useful clue when a market crash is likely to occur.

The VIX index, has emerged as the industry standard for a measure of expected market volatility. Traders pay close attention to the VIX index because it is a good indicator about investor sentiment and market direction.

So the VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge." The VIX CBOE Index (Chicago Board Options Exchange) shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts.

Calls and puts..what are they?

These are options which give the owners the right, but not the obligation to sell or buy a specified amount of an underlying security at a specified price within a specified time. So if an investor has an optimistic view, or bullish outlook on the market and anticipates prices to rise sometime in the future they would buy at today's price, if the price moves upwards, then their trade is in profit, which equates two current market price minus the contract price. This is known as a call option, giving the owner the right to buy shares at a predetermined price sometime in the future. For example, if a stock trades at $40 right now and you buy its call option with a $40 strike price, you have the right to purchase that stock for $40 regardless of the current stock price as long as it has not expired. Even if the stock rises to $80, you still have the right to buy that stock for $40 as long as the call option has not expired.

A put option is the reverse of a call option.

A put option is a financial contract between the buyer and seller of a securities option allowing the buyer to force the seller (or the writer of the option contract) to buy the security. In options trading, when the expects that price will go down they purchase what is known as a short position on a security. This position gives the buyer the right to sell the underlying security at an agreed-upon price (i.e. the strike price) by a certain date. For example, if you have one Mar 18 Taser 10 put, you have the right to sell 100 shares of Taser at $10 until March 2018. If shares of Taser fall to $5 and you exercise the option, you can purchase 100 shares of Taser for $5 in the market and sell the shares to the option's writer for $10 each, which means you make $500 profit (100 x ($10-$5)) on the put option. So put options are used by investors to either profit from a falling market, or for hedging their shares portfolio investment.

The more volatile the market the higher the VIX Index. In the last Financial crash the VIX was nearing the 80 USD mark.

The VIX Index is quoted in percentage points and translates very roughly into the expected change in the S&P 500 Index over the next 30 day period (then annualized). For example if the VIX is 15, this represents an expected annualized change of 15 percent, which equates to 1.25% change up or down for the S&P 500 Index over the next 30 day period. (15%/12=1.25%)

In this example a VIX of 15 would be a low volatility environment.

The VIX is calculated by measuring the PUT/CALL ratio. So when there is a lot of fear in the market option traders will buy put options in greater numbers to protect their portfolios. The VIX index will be high, which is an indication there will be a lot of volatility in the market.

Another important point to note is that VIX pricing is used to calculate near term and next term option month. In other words, it is an indicator of sentiment one month in the future, which can help us to guage the future direction of the market.

For more information on VIX check out www.cboe.com

Zero In

Let's zero in on the main market news that may have flown under your radar.

High end London sales have fallen by twenty percent. These are primary luxury homes in the prime area of London, valued between £1m ($1,606,640) and £2m ($3,213,280) compared with the past six month period. What is causing the drop in sales?

Estate agents believe that buyers are being deterred by the talk of a Mansion Tax and pending general elections scheduled for May 7, 2015.

Recent data from the high end estate agent, Strutt & Parker, indicated that the number of sales in the £2m to £5m bracket, which would exceed the £2m Mansion Tax threshold, fell by 27% for the third quarter of this year compared with July to September in 2013.

Perhaps we may see a sharp market correction in high end real estate soon.

At the most exclusive end, properties worth 5 million pounds sterling and over in the prime central parts of London, defined as Knightsbridge, Belgravia, Chelsea, South Kensington, Fulham, West Chelsea, Kensington and Notting Hill, according to real estate agents have performed better, albeit slightly with declines of 15.2 percent. What this might mean is that at this ultra high end of the market, prices are relatively inelastic. In other words, super high net-worth individuals, are not deterred by paying a few hundred thousand pounds in taxes, which probably amounts to small change for these high-rollers.

“Whilst total values transacted in central London are markedly down on this time last year, we must have a sense of perspective and accept that 2013 was an exceptional year. It is really not surprising that prices are stabilising after the dramatic price increases we saw over the past 12 months," said Stephanie McMahon, head of research at Strutt & Parker.

“Sales volumes are also showing a slowdown and two quarters of data do suggest a trend of decline...We have seen these conditions before in the run up to a general election when speculation mounts."

The UK shadow chancellor Ed Balls shed more light on the mansion tax proposal this week.

The shadow chancellor said that middle-class families will be barred from deferring Labour's mansion tax if they earn more than £42,000 ($67,478). However, higher rate taxpayers who own properties worth more than £2m will have to pay the tax immediately. Only those earning less than £42,000 will be able to defer the payment until they sell the property or transfer ownership.

European bank stress tests are back on the radar again. Are European banks robust enough to cope with another financial, economic shock? Bearing in mind, for the test to have validity and give investors confidence, some banks will probably have to fail. If all the banks passed the stress test then it would lose credibility,so we are most likely going to see some banks fail the stress tests. I understand that the banks are not obliged to make their results public. But the banks that opt to do this, we can assume that they have most likely failed the test.

A media report said at least 11 banks had failed the landmark financial health checks, driving some banking shares lower. Spanish newswire Efe which said that it, along with banks from Italy, Belgium, Cyprus, Portugal and Greece, had failed the ECB review based on preliminary data, but it gave no details of the size of the capital holes at the banks.

The ECB, is scheduled to publish the results for 130 banks on Sunday and is remaining tight lipped on the results of individual banks.

"Any inferences drawn as to the final outcome of the exercise would be highly speculative until the results are final on 26 October," said an ECB spokesman.

There were no immediate comments from the other affected banks on the report, which briefly caused the euro to dip and led to European stocks reversing early gains.

"The bigger, more important question is not which banks have failed but which banks have achieved only a marginal pass," said Jeremy Batstone-Carr, head of private client research at Charles Stanley.

There was slight unease in the European markets ahead of the results with the euro dipping slightly to 1.26, European equity markets did however, recover some recent losses.

Over in the US, despite the low mortgage rates, the trend in slowing housing sales continues. Rates dropped to their lowest level in nearly 18 months last week, which did trigger an 11.6 percent rise in applications, according to the Mortgage Bankers Association. The gains however, were driven entirely by refinances, just as they have been for several weeks. November mortgage applications to purchase homes saw no boost at all from lower rates, falling 5 percent from the previous week and 9 percent from a year ago. Sales of existing homes did increase in September by just over 2 percent from August, according to the National Association of Realtors; however, they are weaker than a year ago.

China's economy has clocked its worst quarter in more than five years, raising concerns over Beijing's ability to meet its own annual growth target.

Gross domestic product expanded by 7.3% in the third quarter versus the same period last year, according to government data, the weakest performance since the global financial crisis. Nevertheless, putting this growth figure into perspective, 7.3 percent economic growth is still an impressive rate and more sustainable compared to the double digit rate at which China was growing, just a few years ago.