A Cheap Hedge for This Market

The S&P 500 is now at an all-time high of 7,000 and is showing definitive signs of rolling over.

So financial advisors, pension fund managers, and cautious individuals have been ringing me up asking what the best way is to hedge the heady 84% gains of the past three years.

You can forget about buying the Volatility Index (VIX) (VXX). The huge contango, the discount front-month futures contracts have to far-month ones, almost guarantees that your hedge will be enormously expensive and expire worthless before it has the chance to do any good.

No, there’s a much better way to do this

Buy deep out-of-the-money, long-dated S&P 500 (SPY) put options. You want to go deep out-of-the-money so your insurance policy is cheap.

You also want to go long dated, so time decay doesn’t kill you, and your option position lives long enough to do some good. By long dated, I’m thinking five months out, like the September 18, 2026, option expiration date, usually when we see a multi-month low.

All of this logic points to the (SPY) September 2026 $550 puts today priced at $7.40, which, as of today, are 20% out-of-the-money.

Here is the beauty of this position. A put option rises in value in falling markets. But so does option implied volatility, creating a leveraged hockey stick effect on the value of your put position. And deep out-of-the-money options always see implied volatilities rise much faster than near-money ones.

One of my Concierge clients executed this strategy in February 2025, and it worked perfectly. It enabled him to turn a $5,000 position into an eye-popping $100,000, a 20-fold profit.

You don’t need the market to drop the full 20% to make enough profit on this position to offset losses elsewhere in your portfolio.

A much more likely 5% market correction would cause the value of the September 18, 2026, $550 puts to jump from $7.40 to $22.00, a gain of 197%, as long as that drop happens quickly. However, add in an expected pop in implied options volatility, and the profit could be as much as 300%.

If we get a February to April 20$ repeat, the options would soar to $140.00. I’ll let you do the math.

So, how many September 18, 2026, $550 puts should you buy?

Let’s say you have a $100,000 portfolio. Only two put option contracts would provide enough coverage for your entire exposure ($100,000/100 shares per contract/$550 (SPY) strike price) = 1.88 contracts, rounded up to two. Two contracts of the September 18, 2026, $550 puts will cost you $1,480 (2 X 100 shares per contract X $7.40).

In other words, $1,400 buys you an insurance policy on a $100,000 portfolio exposure for eight months. Sounds like a deal to me.

There are endless variations on this strategy. For example, it is a good idea to long date your longs and short date your shorts to maximize accelerated time decay in your favor.

In such a scenario, you would stay long the six-month put option described above, but sell short one-month options against it, with a strike 15% out of the money instead of 20%. I could go on and on. That cuts the cost of this hedge by two-thirds.

There are a few qualifications with such a simple hedge. Let’s say that you read the Diary of a Mad Hedge Fund Trader and have a highly concentrated portfolio focused on technology and financial stocks.

In such a case, the tracking error between the (SPY) and your portfolio will be large (after all, that is the point), and you may not get all the downside protection you want.

Yes, you don’t get complete 1:1 coverage. But it’s better than going into such a route naked, with no downside protection at all.

Let’s say you’re a cheapskate and you want your insurance policy for free. Yes, this can be done.

You could get really clever and use the inverse strategy by buying deep out-of-the-money call options on gold. Goldman Sachs (GS) just raised its 2026 year-end target to $5,500, up 24%.

There is another hedging strategy that is far easier to execute. Just take a long cruise around the world. That way, corrections will come and go, and you might not even know about it, unless your butler brings you an online copy of the Wall Street Journal every morning, as mine does.

This is the hedging strategy most of you have pursued for the past nine years, and it has worked really well. At least you end up with a nice tan and some pleasant photos.

As for the September 18, 202,6 $550 put,s they’re most likely end up expiring worthless, but you’ll sleep better at night. Such is the price of peace.

 

I Like this Heading Strategy Better