When stocks, commodities, gold, and talk of the death for the U.S. dollar are all increasing together, the scene is set for a severe stock market, commodities market, and gold price crash. In a crash-stock market or otherwise, potentially all of the 2009 gains for the S&P 500, Dow, oil, gold, silver, and even emerging markets could be lost. Buy and hold has been a losing investment strategy for this decade. With another crash across several investment and stock markets, buy and hold investors will be flushed out once again.
Either an investor must avoid getting swept away in a stock market crash, or learn about hedging positions.
Knowing when to sell out and avoid a market crash all together is the best choice and the hardest. That leaves hedging an investment portfolio with options as the simpler choice.
Hedging with stock options, commodities options, and ETF options can blunt the effect of market crashes.
Avoiding Stock, Commodities, Gold Market Crashes
Avoiding stock market crashes- whether investing in commodities with ETF's, mutual funds, stocks directly, even precious metals like gold and silver- is key to retirement portfolio preservation. The challenge is how to ride the markets up while getting off the investment train before the investment portfolio rides off the cliff and crashes into a ravine.
Applying trend change analysis can make avoiding crashes across all markets possible, though not easy.
2008-2009 has seen more than a 50% recovery in most markets with some emerging markets up more than 65%. Gold prices held up well with the 2008 market crash and silver got crushed below $9. Both recovered lost ground with gold prices hitting new highs and silver prices touching $18. A 15%+ crash- stock market focused, could bring down commodity markets, and gold or silver once again.
Most investors, especially retirement portfolio investments, are still well below the high water mark achieved in 2000. Another stock market crash could set back retirement indefinitely. An options hedge can act as the life preserver for a portfolio suffering through a stock market crash. Definition of a hedge: Protecting a portfolio against market risk. Options can hedge a portfolio by locking in profits when the rest of the portfolio is losing value.
Index Hedges for Reducing Risk in a Crash-Stock Market or Commodity Market
Based on the definition of a hedge, some of the best options strategies for protecting against portfolio risk use index hedges. Index hedges are simply options for an index, such as the S&P500, Dow Jones Industrials, or the QQQQ for high-tech companies, and many other indexes too numerous to mention.
As an example of how options hedging with index hedges can be applied to a retirement portfolio, consider Al's stock portfolio. Al has $500k in a mutual fund that holds about 70% large U.S. stocks, and 30% U.S. bonds. With a 15%+ stock market crash, Al knows that he will lose 10% at least of his portfolio value. Al decides that he is tired of losing money since the 2000 wipe out, when he was heavily invested in the NASDAQ tech stocks. He knows the large U.S. stocks are represented by the S&P500 index or possibly the DJIA index.
Choosing the SP500 Index, Al buys index hedge options for the SP500 with the Ultrashort SP500 Proshare (SDS) options. Al picks index hedge options that will profit with a 10% or more stock market plunge. The index hedge put or short options symbol for a 10% plunge with SDS is SSHVH.X at a strike price of 34.00. Recent quote of $4.30 per Mar 10 expiration for the index hedge SDS option.
Were Al to allocate a small 2% of his $500k portfolio, he could purchase $10k of put options, or a significant 4300 options. Based on current pricing, should the SP500 crash 15%, then Al's index hedge will gain about $4 per option, partly depending on the timing of the crash. If the stock market crash occurs in 2009, then Al could see a $6 per option gain. This small 2% index hedge could bring a $17k+ gain while the stock portion of his portfolio would have dropped roughly $51k.
With a small 2% index hedge in place, risking only $10k out of $500k, Al will have cut the stock market crash pain by over 30%. With a 5% index hedge in place, the option value would have risen to almost completely cover the cost of the stock market plunge. Al's index hedge could also be lifted early without losing the full value before expiration.
There may not be a stock or commodity market crash this year or next. If there is though, index hedge options can keep an investment portfolio from suffering retirement-crushing losses.
Mark Solomon - Your guide for beyond the failed buy and hold strategies, to the creative, alternative and safer strategies for wealth preservation, ...
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