(Not intended to be investment advice, opinions are my own.)
If you’re looking to hedge your portfolio, now is not a great time. Implied volatility on options are extremely high because of the crazy price action over the past few days. So even if you’re directionally correct, chances are the actual move will be less than the discounted move, and you’ll end up making less than expected or even taking a loss.
The time to buy put options was one to two weeks ago, not now.
Right now if you still want to hedge, you’ll need to get creative. And only hedge if you’ve found that you’re not comfortable with your current risk exposure. Don’t hedge because you want to gamble on the market going down even more.
- Idea number one is either shorting or buying put options on a high yield bond index. High yield bonds haven’t majorly sold off yet, but if this trade war keeps going, then it will become harder and harder for weak and overly leveraged firms to keep borrowing. The weakest companies will get simultaneously hit by weaker demand (lower revenues), higher costs, and a much less hospitable lending environment. If that were to happen, then waves of bankruptcies would lead to higher rates for the survivors and even more bankruptcies — in that scenario, a bet against a high yield bond index should provide a nice hedge against the other risky assets…
