Using Options, ETFs And Insider Ownership To Protect Investments

by: Brian Gorban

In these volatile times, it's always wise to have some market hedges as even though we feel we will be 100% right, myself included, on each and every investment, the harsh reality is that is far from the truth. When the market plunges almost 4% like it did Thursday, that is just another reminder that safety must always be used and here are some ways we can do that:

As I wrote in a recent article here, using ETFs that move in the inverse direction of the market allows us to have gains on the brutal days like we experienced yesterday. There's the ProShares UltraShort S&P 500 (SDS), which seeks to correspond to twice the inverse of the S&P 500's (NYSEARCA:SPY) daily performance. That means if the S&P 500 was down 1% this should be up 2%, or as was the case Thursday when it was down just over 3%, this should be up just over 6%, as was the case. If you're heavily invested in a particular sector, say financial stocks I've mentioned here and here, then you can trade the ProShares UltraShort Financials (NYSEARCA:SKF), which seeks to correspond to twice the inverse of the Dow Jones U.S. Financials Index.

Options provide a great tool for protecting the downside by using either puts or calls. The very basic strategy is if you own one of the stocks, say mentioned here for example, you buy a put, which essentially is buying insurance if the stock moves below that strike price. This protects the downside, but of course comes at a cost for that put option, so it has to be determined on a case-by-case basis if the price is cost effective. Another way I like to protect from downside is through covered calls as I've written about here and here. This of course limits the upside, but I'm more than happy with the returns I garner if these shares exercise and if they don't, I've gotten a nice option premium and will simply write more call options against my long holdings.

Stocks with high insider ownership and recent insider buying tend to have more price stability as there's a consistent buyer who strongly believes in the company rather than just switching positions at the market's whim. As I wrote about recently here, here, and here regarding companies that have high insider ownership/recent insider buys, many of them traded favorably today, and in the case of Opko Health and Morgans, actually traded higher, while Ladenburg (NYSEMKT:LTS), Chimera (NYSE:CIM), and Lions Gate (LGF) traded with little to no downside. Many market pundits will point you toward the blue-chip high dividend paying stocks that I've mentioned here and here, but as we saw, without them having that strong internal purchasing power of an insider(s), the stock can move swiftly to the downside. Please be reminded that in the long run the stock should return to its intrinsic value when market psychology normalizes, but it's worth mentioning observations I've made over the almost 15 years I've been following the market.

Disclosure: I am long CIM, NLY, EK, IRET, IRETP.