Defensive strategies

With many pundits anticipating a stock market correction, this is a timely topic. I attended a live presentation on the subject at a local traders group.

For buy and hold investors, the obvious and the easiest is to sell some, take 10%, 20%, 33%, 50% off the table, depending on the style involved. Asset allocators may lower their stock allocation and move some to gold, or bonds, or real estate. In taxable accounts some prefer to take a small position in inverse-ETFs such as SDS, to avoid the taxable event that comes with selling for a profit. Some might move money to low volatility stocks (SPLV is an ETF that only buys low volatility stocks) or defensive sectors such as utilities (XLU) or consumer staples (XLP) are other flavors.

For options, the obvious is to buy puts as insurance. Some sell calls to finance the put purchases, constructing a collar. Some just sell calls to give up some upside to get a tiny bit of downside offset. One of my favorites is selling put backratios for a net credit, though that only gives limited downside protection and actually increases exposure in a full crash. Selling a put backratio involves buying a put, and selling double the number of further out of the money puts. Another thing some are doing is selling their stocks and buying calls. This is near equivalent to buying puts for insurance, depending on the strikes and ratios selected.

Many of these stock market strategies involve a cost. Some choices give up some of the upside (covered calls), some cost an insurance premium (buying insurance puts).