If you are an investor of a nervous persuasion, or just the cynical type who doesn't believe everything is quite as rosy as the fund management and broking firms would lead you to believe, now has never been a better time to take out an insurance policy against the markets taking a turn for the worse next year.
Options or futures contracts have a number of key determinants: namely the current price of the underlying, the market volatility, and the time left on the contract. So as the FTSE 100 approaches year highs and the Vix volatility index - a measure of the implied volatility of S&P 500 index options, or the 'fear index' - approaches four year lows, buying insurance against a black swan event in 2013 has never been cheaper.
If the market is benign next year then money spent on insurance will most likely be lost, but if the worst happens then we have illustrated some ideas to help you work out how much insurance you should take.
Scenario 1
You have a portfolio of £10,000 invested in UK shares, and you are worried about the FTSE 100 returning to 5,000 early next year. In which case Societe Generale offer a covered put warrant SW14 (ISIN-CWN8139V3922) with a strike price of 5,900, and expiry date of 21 June 2013. Should the FTSE plunge over 16 per cent to around 5,000, your portfolio will have lost £1,600. Spending £750 on SW14 warrants at a current price of £0.30 will get you around 2,500 warrants. The estimated price of these warrants should the market fall to 5,000 would be £0.96 making your 2,500 warrants worth £2,400, more than covering your losses.
Scenario 2
You have a portfolio of £10,000 invested in UK shares, and you are worried about the FTSE 100 returning to 5,000 at some point next year. In which case Societe Generale offer a covered put warrant SW15 (ISIN-CWN8139V4003) with a strike price of 5,750, and expiry date of 20 December 2013. Should the FTSE plunge over 16 per cent to around 5,000, your portfolio will have lost £1,600. Spending £1,500 on SW15 warrants at a current price of £0.43 will get you around 3,500 warrants. The estimated price of these warrants should the market fall to 5,000 would be £0.92 making your 3,500 warrants worth £3,220 and covering your losses.
