The 2 Best Ways to Hedge Coronavirus Volatility

The coronavirus that causes COVID-19 has the potential to spread to 54 million people over the next 12 months.

And uncertainty over how fast it will spread has gripped the market these last two weeks.

Could the coronavirus be the black swan event that causes this 11-year bull run to halt in its tracts?

We hope not...

But it absolutely could.

Even though the U.S. Federal Reserve suddenly cut interest rates 50 basis points on Tuesday to combat the market dropping 12% last week, it wasn't enough to calm markets down.

The day of the emergency rate cut, the Dow Jones dropped 700 points.

On Wednesday, the Dow was up 1,100 points... only to give back most of the gains on Thursday, when it dropped another 1,000 points.

And halfway through the trading day Friday, it's already down another 600 points.

Whether the coronavirus is the event that takes out the market or not, you have to be prepared.

You need a plan.

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And we've done the research on how to protect your stocks.

Let's explore the two best ways to hedge coronavirus fears in case this volatility continues.

Ways to Hedge Coronavirus Volatility, No. 2

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Buy gold using SPDR Gold Trust (NYSEARCA: GLD).

Gold helps diversify a stock portfolio because historically, it's inversely correlated to stocks during periods of stress.

That means gold tends to rise when stocks go down.

Since market close on Friday, Feb. 21, the Dow is down 10.8%.

All the while, gold is actually up 1.25%.

That may not seem like much, but just to put it in perspective...

If you had a $100,000 portfolio and were down 10.8%, you'd only have $89,200.

But that same $100,000 portfolio would be worth $101,250 in gold.

That's a difference of $12,050.

One of the most common arguments made against holding gold is that it doesn't produce income (like businesses) or pay interest (like bonds).

But since it's clear that central banks around the world are in a race to lower interest rates, print money, and devalue their currencies - bonds aren't the safe income producers they used to be.

You see, there's roughly $10 trillion of negative yielding debt around the world. That means bond holders are starting to owe money to issuers instead of collecting interest payments.

Logically, gold's stability and upside is a better deal than that.

In order to protect your portfolio, allocate about 5% to 10% of it toward gold.

Ways to Hedge Coronavirus Volatility, No. 1

Options are a great way to protect the long positions in your portfolio.

The best part is you don't need a lot of money to protect your downside.

Here are the two primary ways to use options to hedge your portfolio against the volatility caused by the coronavirus:

  1. Buy puts on the S&P 500 ETF (NYSEArca: SPY).
  2. Buy calls on the CBOE Volatility Index (INDEXCBOE: VIX).

Buying put options on the S&P 500 allows you to make money if the market goes down.

For example, if you buy the May 15 $272 puts for $7.50 per contract and the market drops 10% by April 7, you would make 103%.

Now for the VIX...

It's extremely important to understand that the VIX is also inversely correlated with stocks (like gold).

That means that the VIX also goes up when the market goes down.

So you want to buy call options on the VIX to protect your downside.

If you buy the May 20 $50 calls for $0.38 per contract and the VIX jumps 10 points by April 9, you would make 587%.

Action to Take: Consider buying gold, put options on SPY, or call options on the VIX to protect your portfolio from downside caused by the coronavirus.

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