Defensive Strategies — In this kind of market, there are not a lot of places to hide.
Unless you went long in energy back in January or short everything else around the same time, it’s pretty likely that you’re licking your wounds by now.
So how can you play a little bit of defense and hold on to the value you’re fortunate enough to still have in your portfolio?
Well, an elevated volatility index means higher premiums on options contracts.
For me, in a down market with fewer rips and rallies, this screams covered calls.
If you’re not familiar, a covered call strategy is one in which you buy 100 shares of an underlying stock, and then you turn around and sell a call contract against that position. It’s essentially the combination of a 100-share long position and a single contract short position simultaneously.
With higher volatility in the markets, the premium that you collect selling that call contract will be higher than usual, putting added yield in your pocket.
Sure, your upside is limited if the market has a miracle turnaround and shoots to the moon, but in the short term, you can play a little defense with this strategy.
Another strategy is buying puts against your positions. That being said, premiums are a little high, so you’re going to pay a pretty penny for this insurance in this type of market.
A way to offset this premium is to sell a lower strike price put in conjunction with the purchase of a higher strike price put contract. It affords you some of the downside protection with less of the risk.
With relatively high implied volatility, options seem like a great way to protect yourself. But these complex financial instruments carry their own risks: they’re not for the faint of heart.
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