How To Protect Yourself From The GDP Storm To Be Released This Friday

Includes: SPY
by: Michael McGill, CFA

The final results from the 2nd quarter GDP will be released this Friday (8/26/2011). What happens if these results are worse than what is expected? It will mean a big downturn for the overall market on that day (results are released at 8:30am). Perhaps an investor is looking to protect himself from a possible market downturn. Here are some strategies on how to protect your portfolio if the market dips even further:

Buy September 17 2011 $105.00 puts on the SPY. This is the Spider S&P 500 ETF that follows the S&P 500 at a 1/10 ratio. For example if the S&P 500 is trading at 1150.10 this ETF will be trading at $115.01. Buying puts on this ETF will protect you against a downside loss on the S&P 500. If the corrected GDP results (first estimated report came out on 7/29/11) are worse than expected the markets WILL take a turn for the worse. However, with this option, you will make a gain as the S&P 500 lowers along with the other markets.

Another viable option would be to buy September 21 2011 $45.00 calls on the VIX. This could be a great play given the fact that the VIX shows the market's expectation of 30-day volatility. If the news coming out of the GDP results is less than appealing the 30-day market volatility could go up out of control driving the VIX upward with it, giving you some hefty profits as well.

The next option is what many investors will look to do if the GDP news released is lackluster; it is also what I am looking forward to the most. What I am looking forward to is seeing where the price of gold goes. This Friday could continue to break record highs for the price of gold. If the news is released and is worse than what everyone expects (to be similar to the 7/29/11 GDP release) look for gold prices to skyrocket. This has been the “flight to safety” trend lately along with U.S. treasuries. It is sure to be an entertaining day.

Even though I laid out three strategies to take to protect an investor on this day, do not forget that surveying from the sidelines is not an outrageous scheme either.

Make sure to check out fed chairman Ben Bernanke’s talk at 10:00am on the same day as his words could drive the markets one way or the other.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.