Goldman Says You Should Hedge Your Portfolio With This Trade

Goldman Says You Should Hedge Your Portfolio With This Trade
Stéphane Renevier, CFA

6 months ago1 min

Goldman Sachs has been feeling pretty upbeat about stocks lately, but that’s not stopping it from giving you five solid reasons to consider adding some insurance to your portfolio right now:

Buying protection is cheap: Investors are all-in on stocks and are giving the cold shoulder to downside protection, making it a bargain buy right now.

The market rally’s too narrow: the latest drive higher has been fueled by just a few stocks, which historically has signaled big corrections ahead.

Valuations are high: the S&P 500’s looking pretty pricey, so it doesn’t have a comfy margin of safety if things go wrong.

Good news is already factored in: stocks are already priced for an optimistic outlook. The bar for disappointment is low.

Investors aren’t bearish anymore: with investors already positioned for a rally, it may be harder for the market to keep climbing.

If you own stocks and want to hedge your downside, Goldman recommends buying an S&P 500 put spread collar expiring on December 29th. This strategy, which costs nothing upfront, protects your portfolio if the market falls between 5% and 20%, and reduces your losses if it falls even more. But there’s a tradeoff: you're capping your gains at 8%.

Here’s how the strategy works: buy a “put” option at 5% below the current price, sell a “put” option at 20% below, and sell a “call” option at 8% above. The sales will finance the purchase, making the strategy free to set up. Of course, there are other strategies available too, which I’ve explained in more detail here.



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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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