Stock markets witnessed a bloodbath on Thursday with Sensex and Nifty going down to multi-month lows; investors are struggling to find the right stocks for investing. There is a bearish sentiment in the market and hence, it is important that the investors do not get hassled at the moment, and wait for the right opportunity so that their capital does not get eroded.
The forced halt in stock-market activity, driven by coronavirus outbreak and a geopolitical fight over oil, has proved wrong all algorithms of professional traders and investors.
A pause is helpful for an average investor, who can either be scared and make losses or sit tight in the present situation. It is suggested to contemplate and take a deep breath and then ask yourself, "Is there any change in your long-term goals?" If the answer is no, one should ignore the market volatility.
Considering the current scenario, investors can go for index investing and choose Nifty Bees or Nifty Futures as they are likely to give more gains and are more sustainable and investment-worthy. The other option for the investors is to park their funds as the markets are down, and when the markets start moving upward they can identify momentum stocks and invest in them.
Given the current crisis situation, if an investor is holding a portfolio, he/she can sell call option of either the same stocks or call option of nifty. It is advised to sell call options out of the money as the volatility index (VIX) is trading at 37% and the premiums are very high in comparison to average ones. If the market moves up, the investors would earn money from the portfolio they hold and will lose money on option sold, if the market crosses the strike price.
But if the market moves up, and do not touch the strike price, investors will earn money from the upward movement and the premium they have earned from selling the call option.
If the market is down, the investors would lose money on their holdings (which they were already holding) but earn money out of the call option they had sold against their portfolio. This way, they would be better off.
The markets across the globe will take a longer period of time to start reversing the losses and moving back up.
Crude oil prices too have fallen off the cliff, crashing to $35 a barrel from $68 levels at the start of the year. The twin concerns of a slowing global economy as a result of the spread of the coronavirus pandemic and Russia's refusal to agree to production cuts have meant that oil is on a slippery wicket.
Investors can choose to buy stocks which are impacted by crude oil. However, just because of one week or month of price war, it does not mean that this will be a permanent situation.
Once the market gets attractive again, some of the stocks which will become attractive would be rubber, oil marketing companies (OMCs) and paint industries.
There is a panic situation worldwide and it is not the best time to pick a stock. Indices represent several sectors and industries of the country and when the markets will come out of their fear psychosis, we will get enough time to identify the stocks in momentum.
(The author is Managing Director of FINDOC)
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