What Causes Volatility in the Pakistan Stock Market

By Ghazi Naseem

For a long time, Pakistan's Stock Market was performing exceptionally well. Over the years of continued stable political and improved security indicator further strengthened the economic activity in the country. All of a sudden, political turmoil gripped the country in wake of Panama Leaks accusing head of the ruling party.

Here are the reasons why the Pakistan stock market has been experiencing major volatility.

Political ripple effect:

Pakistan's largest party and PM accused in Panama Gates and ousted after marathon hearings in the country's highest court. As a result, PSX - biggest stock market of Pakistan invariably had a ripple effect all over. When the KSE100 index fell after marking historic high of around 53,000 slipped more than 30% despite venturing into MSCI regime.

Risk of fiscal gaffe:

Persistent rise in the current account deficit due to a higher trade gap led by a significant increase in imports as compared to exports. Pakistan's trade deficit rose 24.18% to over $9.2 billion in the first seven months of the current fiscal, while foreign currency reserves were declining at a rapid pace. The markets are worried the way the local Rupee devolution in recent past, higher trade deficit may pose extra pressure on Pak Rupee.

The total liquid foreign reserves held by the country stood at $18.413 billion on end of February, 2018 including $12.34 held by the SBP and remaining $6.067 billion by the commercial banks.

Foreign Remittances:

According to figures released by the State Bank of Pakistan for the period July-Feb increased by 3.41% to $12,833.64 Million compared to $12,410.54 Million for the corresponding period from last year.

Foreign direct investment (FDI) remained dried up in the seven months of FY18, as FDI inflows came to $1.487 billion during July-January FY18, compared with $1.532 billion a year ago.

Recuperating Exports:

The exports achieving the highest monthly growth yet in the fiscal year by posting 16% increase in dollar terms exports in February 2017. However the current year's export has already contributed additional inflows of around USD 1.5 bn during the first eight months and is expected to reach the figure of additional USD 2.5 bn, during 2017-18. This increase in economic activity in external sector reflects an increase of 0.8% of GDP.

Keep Check on Macroeconomic trends:

Economic manager needs to keep CHECK on current macroeconomic trends to sustain the achieved growth and huge catch up in the financial years ahead provided with controlled and fiscal discipline. Here are the encouraging signs to buildup.

Timely completion of Energy Projects and low output cost would bring down cost of production.

Inflation Rate around 4%.

CPEC projects on track.

Senate Elections clearing the political vague.

Attractive Valuations.

Potential growth in FDI's.

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Option Contract Trading Basics - Stock Option Risks and Strategies

Before you learn the basics about how to trade options and the strategies, it is important to understand the types, cost and risks before opening an options account for trading. This article will focus on stock options vs. foreign currencies, bonds or other securities you can trade options on. This piece will mostly focus on the buy side on the market and the trading strategies used.

What is a Stock Option

An option is the right to buy or sell a stock at the strike price. Each contract on a stock will have an expiration month, a strike price and a premium - which is the cost to buy or short the option. If the contract is not exercised before the option expires, you will lose your money invested in your trading account from that contract. It is important to learn that these instruments are riskier than owning the stocks themselves, because unlike actual shares of stock, options have a time limit. There are 2 types of contracts. Calls and Puts and How to trade them and the basics behind them.

What is a Call Option and how to trade them?

A call option contract gives the holder the right to buy 100 shares of the stock (per contract) at the fixed strike price, which does not change, regardless of the actual market price of the stock. An example of a call option contract would be:

1 PKT Dec 40 Call with a premium of $500. PKT is the stock you are buying the contract on. 1 means One option contract representing 100 shares of PKT. The basic thought and learning how to trade call options in this example is you are paying $500, which is 100% at risk if you do nothing with the contract before December, but you have the right to buy 100 shares of the stock at 40. So, if PKT shoots up to 60. You can exercise the contract and buy 100 shares of it at 40. If you immediately sell the stock in the open market, you would realize a profit of 20 points or $2000. You did pay a premium of $500, so the total net gain in this options trading example would be $1500. So the bottom line is, you always want the market to rise when you are long or have purchased a call option.

Trading Strategy vs. Exercising and Understanding Premiums

With call options, the premium will rise as the market on the underlying stock rises. Buyer demand will increase. This increase in premiums allows for the investor to trade the option in the market for a profit. So you are not exercising the contract, but trading it back. The difference in the premium you paid and the premium it was sold for, will be your profit. The benefit for people looking to learn how to trade options or learn the basics of a trading strategy is you do not need to buy a stock outright to profit from it's increase with calls.

What are Put Options?

A put option is the reverse of a call contract. Puts allow the owner of the contract to SELL a stock at the strike price. You are bearish on the shares or perhaps the sector that the company is in. Since selling a stock short is extremely risky, since you have to cover that short and your buyback price of that stock is unknown. Bet THAT wrong and you are in a world of trouble. However, put options leave the risk to the cost of the option itself - the premium. Learning or getting information on how to trade Puts starts with the above and looking at an example of a put contract. Using the same contract as above, our anticipation of the market is completely different.

1 PKT Dec 40 Put with a premium of $500. If the stock declines, the trader has a right to sell the stock at 40, regardless of how low the market goes. You are bearish when you buy or are long put options. Learning to trade puts or understanding them starts with market direction and what you have paid for the option. Any basic strategy you take on this contract must be done by December. Options normally expire toward the end of the month.

You have the same 3 trading strategy choices.

Let Option Expire - usually because the market went up and trading them is not worth it, nor is exercising your right to sell it at the strike price.

Exercise the Contract - Market declined, so you buy the stock at the lower price and exercise the contract to sell it at 40 and make your profit.

Trading The Option - The market either declined, which raised the premium or the market rose and you are just looking to get out before losing all of your premium.

Conclusion Basics

Trading Options carries nice leverage because you do not have to buy or short the stock itself, which requires more capital.

They carry 100% risk of premiums invested.

There is an expiration time frame to take action after you buy options.

Trading Options should be done slowly and with stocks you are familiar with.

I hope you learned some of the basics of options buy side trading, investing and how to trade them. Look for more of our articles. American Investment Training.

More on Options and Trading Strategies at American Investment Training 

Nick Hunter is the President of American Investment Training. AIT provides broker and investor education, including Call Options. Visit https://www.americaninvestmenttraining.com/ for their full resources.