U.S. Stocks and ZIRP

| June 23, 2014

The most eye-catching articles begin with something about a "stock market crash this year." Although a natural disaster and market reaction is always possible, there aren't many reasons that such a full-out "Stock Market Crash Like 1929" will happen.

That's because the U.S. Federal Reserve has made putting money into historically low-risk investments like bank CDs or Treasury bills a bad idea. Interest rates are so low that, after the annual inflation rate (CPI) is deducted, investors receive a negative return. Zero Interest Rate Policy (ZIRP) continues to be a compelling reason to keep money in stocks.

Why Traditionally Low Risk Investments Are Risky Right Now
The low-risk investor always wants to protect and preserve capital first and, perhaps for the first time in the history of investing, safe investments really aren't safe. Savings bonds, money funds, or short-term bond ETFs are still in use by those who want to keep money relatively liquid and safe. But the ultra-conservative investor knows at the outset that he or she is getting less than original buying power of capital back when the "safe" investment matures. Getting higher yields on CDs, Treasuries, or corporate bonds either means buying longer bonds or lower credit quality.

Market Declines, Buying Opportunities
Traders have often quipped that sell-offs present long-term investors with buying opportunities, and perhaps there's never been a better example of why this old adage is true than today. Temporary market dips are seen by domestic and international buyers as a way to average down cost basis or take new positions in stocks. The world continues to see the U.S. equity markets and U.S. dollar as among the safest in the world.

For these reasons, options on U.S. equities and other securities continue to attract more interest. A short-term trader isn't interested in long-term trends. He or she is interested in trading on the right side of the current trend and using leverage. Unlike investment advice of yesteryear, options are also used by investors to generate income or hedge an existing position or an entire portfolio.

Making Money with Exotic Options
Many investors have a general idea about how exchange-traded options work. The trader buys a call if he or she believes the market trend for a company's shares is going up, or buys a put if the opposite is true. He or she can also sell calls if the trend for shares seems to be on the decline, but that's a riskier strategy. Sophisticated investors can structure their own transactions, with the help of suitable counter-parties, over-the-counter. But OTC trades are sometimes perceived as higher risk and investors rightly ask about dealer mark-ups.

Binary options, on the other hand, help traders make money in all-or-none scenarios. These options enable the trader to know the exact payout of the options at the end of transaction. (They don't trade at a premium or discount to an underlying security, because binary options are a pure-play directional price bet.) The trader wins or loses in binary options. Banc De Binary analysts report that the economic calendar, geopolitical events and market sentiment should be considered in exotic and binary options trading. Like exchange-traded options, binary options are structured as either calls or puts. A trader buys binary calls if a higher price is expected and binary puts if a lower price is predicted.

Category: Finances

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