The Best Way to Help Your Portfolio Survive the Next Crisis
Editor's note: Amid the coronavirus pandemic, portfolio "insurance" has proved to be essential...
You can't predict when the next crisis will strike. But it's important to always be prepared.
Today's Masters Series is adapted from the March 20 edition of our free DailyWealth e-letter. In it, Stansberry's Big Trade editor Bill McGilton elaborates on his strategy... explains why it's so successful in a time like this... and details the latest addition to his toolkit...
The Best Way to Help Your Portfolio Survive the Next Crisis
This is what we prepared for...
Stocks have plummeted. The Dow Jones Industrial Average suffered its worst-ever point loss on Monday.
It's impossible to predict events like the global spread of a deadly disease... like the coronavirus, the cause of the current crisis. But with the right strategy in place, you can hedge against unforeseen disaster – months in advance.
Just think back to what happened in December 2018... Back then, the S&P 500 Index plummeted by more than 300 points in the course of a month. It fell roughly 20% from its October 2018 highs.
Most investors saw any gains for the year evaporate. Even David Einhorn – one of Wall Street's more famous hedge-fund managers – watched his Greenlight Capital turn into one of the year's worst performers... down 28% at the end of November.
Meanwhile, our Stansberry's Big Trade portfolio soared...
In November, we held 13 open positions with six winners for an average gain of 1%. By December, we were sitting on 10 winners for an average gain of 65%. Five were showing triple-digit gains.
Now, volatility is spiking again... handing us more triple-digit winners and the ability to offset some of our losses.
All this might sound beyond belief. But we've been waiting for the peak of this decadelong bull market. And in Big Trade, we've used a key strategy to lock in our "portfolio insurance" before the next downswing...
The market is more volatile than it has been in years.
Gone are the days of 2017. Back then, the Volatility Index ("VIX") – also known as the market's "fear gauge" – was trading at sub-10 levels... all-time lows.
Now, the VIX is soaring. Investor panic is at multiyear highs – surpassing levels reached in 2008. Take a look...
The market has sold off sharply since mid-February. Investors are afraid of the coronavirus and the resulting slowdown in the economy.
But it can get much worse from here. That's where this strategy comes in...
The strategy we use in Big Trade is all about intelligent use of speculation. We buy put options as a form of insurance to make leveraged bets against bad businesses – companies that are heavily indebted with poor prospects.
These are asymmetrical bets, meaning there's disproportionate upside. A winning trade can pay many times more than the cost of a put option or a short recommendation.
Here's how it works – and what it has to do with volatility...
Options traders use fancy terms like "Black-Scholes" and "implied volatility" when they talk about option prices. But trading options is really no different from other types of insurance.
A risky company will cost more to insure (using put options) than a conservative, blue-chip company. This price difference is called the "implied volatility." Risky companies cost more to insure because the market expects them to have bigger price swings than more stable blue-chip companies.
Simply put, the VIX is actually a measure of implied volatility. It looks at options prices for all the stocks in the S&P 500. When the VIX is high – in the aftermath of a crash, for example – put prices on every company are up drastically.
Investors become desperate... and will pay a lot more for portfolio insurance. So a VIX level at more than 20 typically signals market fear, while a VIX level at less than 15 represents a calm market.
This is very important to understand. You see, times like today's crisis are when our speculations pay off. When the VIX is at such hugely elevated levels, it sends our portfolio insurance skyrocketing.
We want to buy well ahead of panics like these... when volatility is low, and the market is pricing options as if there's nothing wrong.
When the VIX is at less than 20, we've used those opportunities to build out a portfolio of cheap puts. Then, when the market finally wakes up and pushes the VIX higher, we take profits as the prices on the puts skyrocket.
We also recommend placing small bets across a diversified portfolio of companies. That limits our risk, but gives us plenty of upside. In other words, if an individual put expires worthless, it should be so small relative to your overall portfolio that it won't hurt you.
And if we get a sell-off (like we've seen recently), the price of the put can soar triple digits... and help offset some of the losses you may experience in other parts of your portfolio.
We have started to see the benefits of these bets in recent weeks... Since the end of February alone, we've closed four trades for gains of 227%, 137%, 126%, and 81%.
And this could be just the beginning of a volatile 2020.
There are other ways to hedge your portfolio – for instance, buying safe-haven assets like gold and taking short positions in troubled companies. But this is by far the best way to make truly outsized returns in a crisis.
If we see more losses from here, I hope you'll have this strategy in place... helping your portfolio bear the brunt of the next market sell-off.
And the good news is... we're adding a new service to Stansberry's Big Trade. Because of the spike in volatility, we can take advantage of it in a different way. Let me explain...
Everybody wants insurance right now. Option premiums have raced higher... even on the best businesses in the world. Stocks like Apple, Microsoft, Coca-Cola, Hershey, etc., have all sold off with the market crash.
Now is the time to add to our Big Trade strategy... and take advantage of fear. If we can't buy cheap and sell high, the best thing to do is the opposite – sell high, and then wait to buy low.
The combination of cheap stock prices on high-quality businesses and high-risk premiums in the options market makes a good opportunity for smart investors to cash in on fear.
So in addition to buying puts on the weakest companies, we're going to generate income by selling expensive puts on some of the best companies we wouldn't mind owning if we get put shares. In today's environment, we can collect high premiums by selling these put options.
In a brand-new special report, we just showed subscribers how to sell the put options up front, receive a cash payment up front on five high-quality stocks, and profit as the fortunes of these solid businesses improve. (Again, this is the opposite of our usual strategy of buying puts – where we profit as a business declines.)
Moving forward, we're only going to sell puts on the best companies that we wouldn't mind owning if their stocks get put to us... by writing insurance on companies that offer high premiums. In this way, we're being paid handsomely by other investors for the obligation to buy these stocks if they fall below the strike price.
No matter what happens, we're set to win.
If the stock doesn't fall below the strike price by expiration, we keep our put premium and we don't have to buy shares. (That's what we bet will happen when we open a position.) But even if the stock does fall below the strike price, we'll still be buying shares of a great company that we don't mind owning anyway, at a good price.
Our goal with this adjusted put-selling strategy is to cash in on falling volatility and rising stock prices as the stock markets settle... and before the puts on these stocks expire. In this way, we can buy back the puts we sold at a minimal price and close out the position – earning a higher annualized return on our investment.
So as you can see, in Big Trade, we're always adapting our toolkit to help our subscribers make the most of what's happening in the markets... And now, we're positioned to profit whether it's the calm before the next storm or taking advantage as the panic subsides.
Good investing,
Bill McGilton
Editor's note: Last Thursday, we hosted an emergency briefing with Bill to discuss the current state of the markets – and to share all the details about his remarkable "portfolio insurance" strategy. He even shared three companies to target with this type of trade... with triple-digit potential. For a limited time, you can watch the free replay right here.