Question

What are the advantages of investing in bonds and options?

Answer 1

Advantages of bonds :

1.Bonds have a clear advantage over other securities. The volatility of bonds (especially short and medium dated bonds) is lower than that of equities (stocks).

2.Thus bonds are generally viewed as safer investments than stocks. In addition, bonds do suffer from less day-to-day volatility than stocks, and the interest payments of bonds are sometimes higher than the general level of dividend payments.

3.Bonds are often liquid. It is often fairly easy for an institution to sell a large quantity of bonds without affecting the price much, which may be more difficult for equities. In effect, bonds are attractive because of the comparative certainty of a fixed interest payment twice a year and a fixed lump sum at maturity.

4.4.Bondholde also enjoy a measure of legal protection: under the law of most countries, if a company goes bankrupt, its bondholders will often receive some money back (the recovery amount), whereas the company’s equity stock often ends up valueless.

5.5.The are also a variety of bonds to fit different needs of investors, including fixed rated bonds, floating rate bonds, zero coupon bonds, convertible bonds, and inflation linked bonds.

Advantages of options:

1.Limi risk – Another benefit of options buying is that the risk is limited to the investment you make. Suppose, in context to the above example, you buy shares of ABC Ltd. and on the next day, the company comes up with the news of closing one of its subsidiaries and aftermath the stock opens 15% below your entry price. Now, the stock price falls to Rs 110.50, while the 130 call becomes zero. In case of stock, you would incur a loss of Rs 2,34,000; while in options, you would lose Rs 60,000 - the entire investment amount, which is far less than the one incurred in stock trading.

2.Higher potential returns – By trading in options, one will experience higher percentage returns compared to stocks. Lets assume, the delta of ABC Ltd. is 0.80, which suggests that options price will rise by 80% of stock price. If stock moves up to Rs 13, you will earn 10% return. While your option position will gain Rs 10.40 on the investment of Rs 5. Here, the return on investment is nearly 208%, which is much better than the return on stock. On the flip side, if you are on the wrong side of trade, one may end up losing the entire investment amount.If you have been a seller of an option and the stock moves in the opposite direction than you thought, your take home losses accordingly.

3.Works in different market scenarios - One of the key advantages of options trading is alter strategies as per different market conditions. There are various strategies for all kind of markets, whether bullish, bearish or sideways - Long call, Bull call spread, Long Put, Bear put spread, long straddle, short straddle, etc. One can switch his strategies as per market condition.

4.Hedging - Every individual trading in stock market is exposed to a certain risk. In the event of any adverse market movements, hedging simply protects your trading positions from incurring loss. Suppose, you picked a stock of ABC Ltd. for Rs 100 six months back and now it is trading at Rs 125; here, you are earning a return of 25% on your investment. Now due to result season, you realize that the markets may soon enter a turbulent phase, which may also result in losing the money you earned during this time frame. In such scenario, you can hedge you position by simply buying ATM put option for same quantity, which will limit your downside during adverse market condition

. 5.Income from existing portfolio –Any long term investors, who would like to earn some return or who want to lower the cost of their existing portfolios, can opt for covered call writing. In this case, one can write call option of the stocks he holds, which may give him some income on investment.