James Daley: Day trading? More like gambling, really

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My new stockbroking account was finally up and running last week, forcing me to make my first difficult decision: where to invest? Although I'm well and truly in the optimists camp when it comes to the long-term prosperity of the UK and US stock markets, I'm pretty confident that as long as credit markets remain jammed up, and the fallout of the current crisis continues to spread across the developing world, British markets will be incredibly volatile.

For that reason, I've found it hard to do the sensible thing and simply buy a few stocks which I think are severely undervalued and which will do well when the recovery comes (whenever that may be). Instead, with markets regularly jumping or falling 5 per cent in a day (even 10 per cent in Asia), I couldn't resist starting out with a little day-trading.

I should begin by saying that I would not advise anyone else to follow my lead, unless they've got a bit of cash which they're willing to lose. On the scale of gambling to investing, my activities over the past week have been far closer to the gambling end of the spectrum. However, it's certainly been fascinating, even mesmerising, studying how markets react to the newsflow of the day and observing how fast they can move.

I've been trading covered warrants, which are a bit like options – giving you exposure to an individual stock, equity index or commodity for a fraction of the cost of actually buying the security directly. Furthermore, these are geared instruments, so if you buy a FTSE 100 "call" warrant (which is a bet on the market rising), the price of your warrant might rise 3, 5 or even 10 per cent for every 1 per cent rise in the index (and vice versa, of course). If you think the market's going to fall, you can buy a "put" warrant, which increases in value as the index drops. The gearing means you can make or lose a lot of money in a short space of time.

So, when I opened my trading account just over a week ago, I started off buying a FTSE 100 call warrant during a morning when the index was down 8 per cent. Over the following days, the index started to rise, and after making a bit of a profit, I decided to cash in and wait for what looked like the next downswing.

My bet was that the US Q3 GDP figures, which were published on Thursday, would do the trick – so I bought a put warrant on the FTSE on Wednesday. Alas, markets continued rising on Thursday, but did eventually come back on Thursday afternoon – though still leaving me slightly out of the money.

I haven't put much cash on the line, and like all gamblers, I'm sure it'll be the casino that wins in the end. But I'm hanging on to my put warrant for now, as I'm certain the FTSE will be back down below 4,000 points within the next few weeks.

For the more conservative, covered warrants can be a useful tool for building some protection into your portfolio. A put warrant, for example, will help to maintain your portfolio's value if there's a sudden dive in the market. So these are not just for gamblers like me. To learn more about them, pay a visit to the SocGen site at uk.warrants.com.


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