Reversal

Today's Market Action
New worries in the US on Freddie Mac and Fannie Mae have caused the US market to reverse from previous gains. The same goes here when the market action from the US is continued in this part of the world. The STI shed a solid 47.50, losing all it gained yesterday to reach a low of 2886.62. The number looks nice but it is not. Put Warrants dominated the Top Gainers and Top % Gainers. Top Losers were blue-chips and Top % losers were Call Warrants.

Insights and Opinion
Feedback from someone who read this space is that we need more than just commentary. So here is more.

As I have mentioned, yesterday's uptrend was not sustainable. Today's worries have brought the reversal back very soon. Looking at the action in the market, it can be noticed that volatility is well managed with the use of CW and PW. A point I failed to address clearly in the last post was the idea of hedging. Warrants are used to hedge the opposite movement (just in case one is wrong). Although the cost of hedging can eat away profits, this cost is well spent when we think about managing our risk. Think of it as this, "it is easier to make less profits than it is to make large profits". So when we hedge and make less profits, risk is lesser and we make profits easier. If this is scaled up, it can make more, in terms of absolute amount of profits, with lesser risk.

Keeping "hedging" in mind, the activity of PW does not necessarily translate into an expectation of a bear market, it also shows that some are hedging against potential downside by shorting the Put when going long on the underlying. This takes into consideration that some may be doing this while trying to take advantage of lower prices.