Protecting Against Downside Risk As Retail Stock Report Earnings

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Protecting Against Downside Risk As Retail Stock Report Earnings


The increase in market volatility the past couple weeks is helping to reawaken interest in hedging with options. More specifically, I’m seeing a lot more downside protection trades in the options market than before the correction at the beginning of February.

Investors have quickly remembered that stocks can move really fast when things get hairy. With the VIX (the S&P 500 Volatility Index) up near 20 (it was about 10 in January), we’re seeing more volatility than we’ve experienced in quite some time. More volatility comes with uncertainty, and the markets hate uncertainty.

One way to combat uncertainty is by hedging your positions. If you have a long stock portfolio, like most people, then using options to protect your portfolio is a smart and easy way to give peace of mind. Of course you can also hedge individual stocks or even hedge sectors.

For instance, this week we’re going to see a lot of big retail stocks report earnings. If you’re portfolio has exposure to retail stocks (and most do), then you could consider using puts on a sector ETF to protect against a selloff in the sector (due to bad earnings or otherwise).

The most popular retail sector ETF is SPDR Consumer Staples Select ETF (NYSE: XLP). It trades about 13 million shares a day on average and includes most of the key big name retail stores.

At least one big trader is taking an interesting approach to protecting against a down move in the retail sector. The trader is using a position that actually makes money if nothing happens, but can also pull in big bucks if XLP takes a dive.


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