There has been quite the debate among financial professionals recently. While some insist that the market is healthy, others continue to warn of dangerous bubbles in worldwide markets that could lead to massive losses. However, not everyone loses when bubbles burst. As a matter of fact, those who understand how to hedge properly tend to turn declining market activity into gains. With that said, today, we’ll talk about some of the underlying factors that are causing experts to be concerned about a bubble and how you can use binary options to hedge against declines when the bubble bursts.
Signs That We Are Indeed Experiencing A Bubble
There are several underlying factors that lead experts to believe that we are in the midst of a bubble in the market. Here are some of the biggest issues experts point to…
- Length Of The Bull Market – The bull market has kept a solid pace for 6 years now. Any investor knows that the market tends to move in waves. A bull market takes assets to extreme valuations for a few years, then a correction ensues driving the stocks down to realistic values. However, bull markets don’t usually last 6 years; and with it lasting this long, more dangers become apparent.
- Incredibly High Valuations – As a result of 6 years of growth in the market, stocks these days are trading with valuations that are way too high. The average valuation on US stocks is now reaching around 17 times earnings expectations. At these valuations, investors aren’t likely to continue to push any higher as they are already paying quite the premium to purchase stocks as is.
- Strong US Dollar – On top of high valuations, the strong US dollar is causing a world of issues on its own. With a strong dollar, US exports struggle; leading to lower than expected earnings and declines in the market.
- Low Oil Prices & Economic Turmoil – These issues may prove to be the needle that pops the bubble in the market. Low oil prices are scary to investors as the energy sector makes up a good portion of the US market and economy. Therefore, low oil prices put strain on economic and market conditions. With new developments threatening to drive the price of oil down even further, investors may start selling stocks and looking for safe havens. If oil wasn’t enough, we also have the issues of the Greek debt crisis and Chinese market collapse striking fear in the hearts of investors. Combined, these issues could spark a massive sell off that sends US markets into bear mode!
Under circumstances like this, it’s not uncommon for investors to decide to abandon the market all together. After all, it’s hard to determine when the bubble will burst and how much money will be lost in the process. However, even by abandoning the market, investors maintain an investment in the United States Dollar. After all, if all of their money is cash, and the dollar collapses, money is lost. Nonetheless, there is a way to hedge against losses from the dollar and the market…
Binary Options Are A Great Way To Make Your Money Grow In Down Markets
I came across an expert opinion on the matter of using binary options to make money in down markets on Finance Magnets; and I couldn’t have said it better myself. The opinion came from expert investor Idan Levitov, Vice President of Trading at anyoption. Here’s what he had to say about using binary options as a bubble investment…
“Bubble investing is very challenging because understanding when the bubble is going to burst is very difficult, even for the seasoned professional. Intervention from Central Banks has been the driving force behind the valuation of financial assets over the past few years as they attempt to reflate the bubble. However, there are many concerns they have gone too far. The warnings are dire and the predictions unpleasant, but that does not mean a losing proposition for binary options traders. The beauty of binary options is being able to profit from increases or decreases in financial markets.
Aside from the ability to trade directionally in the event of a bubble environment that could potentially pop, binary options affords investors the ability to hedge positions. Let’s say an investment portfolio holding the S&P 500 as a core position needed to be hedged with options. An investor could conceivably take an offsetting short position in an equivalent amount of binary options. The investor might see the value of the S&P 500 position decline, but would be able to capitalize on the gains from the binary options position. By utilizing this strategy, the investor has lost no money dispite the downside in the core S&P 500 position.”
So all in all, even though financial markets are a bit scary at the moment, investors still have the opportunity to hedge and ensure that they don’t take losses when the bubble bursts. When this happens and the market moves into bearish territory, investors will have the ability to divert to binary options for profits during the bear market.
What Do You Think?
Do you think we’re in the midst of a bubble in the market? Will you be using options as a hedge? Let us know in the comments below!