With the S&P 500 hitting a new high intra-day, here are a couple of ways to hedge against a market drop over the next six months using the SPDR S&P 500 ETF (NYSEARCA:SPY). For a step-by-step example of hedging against market risk using another index ETF, see this post.
Hedging Against A Greater-Than-15% Drop
These were the optimal puts*, as of this morning, to hedge 1000 shares of SPY against a greater-than-15% drop by January 17th:
As you can see at the bottom of the screen capture above, the cost of this protection, as a percentage of position value, was 1.09%. Note that, to be conservative, this cost was calculated using the ask price of the optimal puts. In practice, an investor can often buy puts for less (i.e., for some price between the bid and ask).
Hedging Against A Greater-Than-20% Drop
These were the optimal puts, as of this morning, to hedge 1000 shares of SPY against a greater-than-20% drop between now and January 17th:
As you can see at the bottom of the screen capture above, the cost of this protection, as a percentage of position value, was 0.64%.
Possibly More Protection Than Promised
In some cases, hedges such as the ones above can provide more protection than promised. For a recent example of that, see this post about hedging shares of BlackBerry (BBRY).
*Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance PhD to sort through and analyze all of the available puts for your stocks and ETFs, scanning for the optimal ones. The screen captures above come from the Portfolio Armor iOS app.