Protecting one’s portfolio can be done in various ways – by neutralizing long stocks with equivalent short pays, buying inverse ETFs, raising large amounts of cash by unloading long positions or perhaps by purchasing put options, which will advance if the market should decline.
With volatility so low and markets potentially vulnerable to some downside, it makes great sense
Any one of these approaches would work as good defense, but the least expensive and most likely to be most effective would be to buy puts, specifically index options. Put options can be bought on just about any index, but for simplicity purposes we’ll talk about the main indices for the US markets – SPX 500, Dow Industrials, Russell 2K and Nasdaq.
Options that trade on these indices are quite liquid and offer may deep strikes. I would consider the SPY, DIA, IWM and QQQ as the most appropriate vehicles. But how much to buy that will offer enough protection? We have to be careful not to spend too much and go overboard, but of the understanding markets could continue higher – rendering our protection worthless.
Put options will not only provide protection but also give us great leverage. Hence, a small proportion of put purchases would do the trick, such as 7-10% of the amount currently invested. A 100K account with 50K in stock holdings, one might buy 5K worth or puts on these indices scattered through various strike prices and expiration dates.
