The simplest way to hedge against a stock market crash is to buy put options. Ideally, your option insurance should only put a 1% drag on your annual returns. In reality, it will cost more. However, the larger the market correction, the more valuable these options will become, and the greater your insurance payoff: Being underinsured beats no insurance at all. If your portfolio loses 10–20% during a 50% market decline, that would be a big win- consider it just like paying your deductible. You might take a loss, but you preserved plenty of capital to rebuild your portfolio. The key is not to wait until a financial crisis unfolds to buy portfolio insurance. Always buy insurance before you need it.
You can also consider put writing. The great thing about put writing is that you earn income on companies you want to own without exposing yourself to the downside risk in case of a correction. If the stock falls in your buy range (i.e., is below your strike price), you get to buy it at your desired entry price. If the stock doesn’t fall in your buy range (i.e., is above your strike price), you get to keep the option income with no further obligations. This is what I call the “Heads you win, tails you win” strategy.
The simplest way to hedge against a stock market crash is to buy put options. Ideally, your option insurance should only put a 1% drag on your annual returns. In reality, it will cost more. However, the larger the market correction, the more valuable these options will become, and the greater your insurance payoff: Being underinsured beats no insurance at all. If your portfolio loses 10–20% during a 50% market decline, that would be a big win- consider it just like paying your deductible. You might take a loss, but you preserved plenty of capital to rebuild your portfolio. The key is not to wait until a financial crisis unfolds to buy portfolio insurance. Always buy insurance before you need it.
You can also consider put writing. The great thing about put writing is that you earn income on companies you want to own without exposing yourself to the downside risk in case of a correction. If the stock falls in your buy range (i.e., is below your strike price), you get to buy it at your desired entry price. If the stock doesn’t fall in your buy range (i.e., is above your strike price), you get to keep the option income with no further obligations. This is what I call the “Heads you win, tails you win” strategy.