Angelica Lopez- 400002613

Derivatives: WEEK 2

February 25th, 2020

Patience in the Midst of Uncertainty

One of the fundamental principles in finance “ Market prices reflect information,”

was evident throughout week 2 (February 17-February 21st). News of the coronavirus spread

plagued the stock market and major indexes plummeted. According to a news article by

CNBC, February was one of Wall Street’s wildest months since 2008. The significant fall in

my portfolio’s returns was devasting. If I were a non-finance person, I would have

immediately sold off all ETFs that were yielding high negative returns; However, looking at

the situation through the lens of a finance person, I considered the transaction costs and

decided to hold my stocks in hope of a turn in market conditions. This week, trades

comprised of stop loss orders and short selling. Additional shares ( using stop loss orders)

were purchased in three ETF’s: iShares COMEX Gold Trust (IAU), SPDR Gold Trust

(GLD), iShares 20+ Year Treasury Bond ETF (TLT). Establishing stop loss orders was ideal

since the stock market was down and prices were plummeting; Setting a stop-loss order for

10% below the price would essentially limit my loss to 10%. Moreover, I tried to capitalized

on the down turn in the market by buying additional shares (stop-loss orders) in ETF’s that

were yielding the highest return in my portfolio. To cut losses, my ETF’s would be sold at

the prevailing market prices if they fell 10% below their prices. I found these trades to be

advantageous given that I didn’t have to monitor them and the transaction would be executed

automatically. Moreover, a more risky trade was conducted- short selling. I short sold 500

ETF’s in the Vanguard group Inc, Vanguard healthcare ETF and received proceeds of

$78,177.55. Given the prevalent market conditions with the coronavirus spread, I presumed

that prices would fall ,and I could later buy these stocks back at a lower price to return them
to the lender. Overall, both type of trades, stop loss orders , and short selling were suitable in

the face plummeting stock prices ,and they yielded favorable returns.

In the course of buying these ETF’s I learnt that a margin/loan can be established

when more securities are purchased than the cash that is available. I also appreciated the

value of engaging in different stock orders to cut losses and minimize risk. Moreover, the

volatility in the stock market taught me that a change in information, specifically the release

of unfavorable information can have a severe impact on the market and on portfolio returns.

Overall, the most important insight gained this week was patience in trading; Initially, I

suffered from loss aversion. My initial thought was to sell off all ETF’s that were yielding

losses to store up cash that would provide a return. Nonetheless, I remembered that

transaction costs ( commissions) were involved, and it would be prudent to merely hold the

ETF and wait until market conditions change.