Effective Strategies to Safeguard Your Stock Gains from Disappearing
Discover proven methods to protect your unrealized stock profits from sudden market downturns and maximize your investment security.
The remarkable bull market that started in March 2009 has propelled the value of U.S. stocks by an astonishing $22 trillion. While this growth is impressive, savvy investors understand that unrealized gains—also known as paper profits—can quickly vanish during the next market correction. Beyond simply selling stocks to lock in profits and holding cash, one advanced strategy to shield your portfolio involves hedging with options, as highlighted by Barron's.
Using Put Options on SPDR ETFs
Financial expert Steven Sears from Barron's recommends purchasing April $265 put options on the SPDR S&P 500 ETF (SPY), which were priced at $4.16 as of early January. To hedge a $500,000 portfolio, Sears advises acquiring 19 put contracts (each covering 100 shares at $265 per share, totaling $503,500), with an estimated premium and commission cost of around $8,000.
These put options expire on April 20, a period when selling pressure is expected as investors raise cash for tax obligations. If SPY’s price drops below $265 by expiration, exercising these puts can help offset portfolio losses. For instance, if SPY falls to $255, the puts would generate a $19,000 gain (19 contracts × 100 shares × $10 difference), cushioning the impact of the downturn.
As of January 4, the SPDR S&P 500 closed at $271.57, making the $265 strike price about a 2.4% decline. Sears also notes a growing trend of institutional investors purchasing puts on the S&P 500 to protect their holdings.
Additional Defensive Tactics
TD Ameritrade’s chief market strategist suggests prudently "taking some profits off the table" and reassessing asset allocations to adapt to market conditions. Selective investment opportunities remain for those who carefully evaluate the landscape.
Instead of put options on ETFs, investors may also consider buying puts directly on the S&P 500 index for a more targeted hedge.
Bank of America Merrill Lynch proposes a sophisticated approach where put purchases are partially funded by selling lower strike puts, reducing overall hedging costs.
Natixis Global Asset Management’s strategist recommends minimizing risk within each asset class rather than altering the overall portfolio mix, offering a nuanced way to 'de-risk' investments ahead of potential market downturns.
Research by the Financial Times highlights that stocks with high returns on invested capital (ROIC) demonstrated resilience during the last bear market, suggesting these may outperform in future crashes.
Understanding Market Capitalization Trends
On January 27, Seeking Alpha estimated the total U.S. stock market capitalization at approximately $25.6 trillion, a significant rise from $11.4 trillion on Election Day 2008. Using the Russell 3000 Index—which represents over 98% of U.S. market cap—they calculated that during the bear market bottom on March 9, 2009, market cap dropped to about $7.7 trillion. Since then, by January 3, 2018, the market cap surged to nearly $30 trillion, reflecting a $22 trillion increase during the bull market.
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