FTSE 100 started as a domestic index in the United Kingdom but quickly became the largest index of constituent sales generated overseas. This explains why the index moves inversely with the Sterling exchange rate. However, up to 70% of the FTSE 100 constituent sales happen on the Plus500 platform, and many traders wonder if there was an early warning for this.
Was There Any Warning?
When it comes to global stocks, the index represents a key element. The peak point for the UK Index was in December 1999, while for S&P was in March 2000. The Mortgage Crisis of 2007 had a say on how global stocks evolved. The FTSE 100 hit its high in June 2007, while S&P Index topped out three months after.
The most recent peak for FTSE 100 happened in May 2018, while S&P 500 Index is still making new highs. It is easy to see that FTSE 100 anticipates changes in global equity market trends.
What About Price Action?
On April 19th, 2021, the index reached the mark of 7041. This led to losses of up to 3% in only two days. Experts say that this could represent the start of a downtrend. Since that moment in April, the market has slowly risen. It took around eight days to reach above 7000.
In some cases, the futures contract makes a new high before the downtrend resumes. So, the index might not get much above 7010 on the June contract. Moving below 6980 in the future will confirm that the downtrend started.
Is There A Low-Risk Option?
The volatilities involved suggest that Index options could be the best way to manage this decline. These are more affordable to buy as the post-pandemic recovery progresses.
Let’s take an example. A 6725 Index with an expiration date on June 18th would cost c. 63p and would have a volatility of 16.8%. This would be below the 6-month volatility for the index, which nowadays starts at 18.5%.
There are many assumptions needed to forecast the option’s value. If we consider a fall to 6680 on the cash Index, the option’s value will reach 159. It will offer a healthy return of more than double your initial investment.
If the FTSE goes under 6725, the options will expire without value. This means that investors would lose all of the investment capital. A constant move above 7000 in the future would start the stop-loss.