How to protect your portfolio for the risk of economic downturn?

It is hard to make predictions as we are in an early economic growth cycle challenged by the uncertainty of the pandemic, however there are options to avoid risk by diversifying widely. The first step to diversify is to have exposure to government bonds such as US treasuries and high quality emerging market bonds like Chinnesse government bonds. The second step is to acquire real assets that will provide hedge in a market downturn and can mitigate inflation surprise risks such as gold and high quality currencies (i.e. Japanesse Yens).

  1. The market reflects everything we eat, the gasoline we use, the houses we buy, the clothes we wear, the healthcare we use, our recreation, financial services. Since I exist and in history everything has gone up and increases with price. As economies become more industrialized and technology reaches every spot of the earth with marketing and advertisement, consumption will always surpass supply making this more expensive. Inflation is the norm and exposure to the market is a hedge against inflation.
  2. After every market correction there is a bull market that follows.
  3. If you don’t need the funds immediately and your financial plan still reflects the same investment exposure, do not sell your assets on a market downturn.

How can stock options signal the market?

Stock options gives us an idea of what institutions and big players are thinking — and where they’re making their bets. A trade option flow makes it easy to track unusual and super-sized bets signaling positions that are worth exploring.

Long Straddle

A long straddle is an options strategy where the trader purchases both a long call and a long put on the same underlying asset with the same expiration date and strike price. The strike price is at-the-money or as close to it as possible. Since calls benefit from an upward move, and puts benefit from a downward move in the underlying security, both of these components cancel out small moves in either direction, Therefore the goal of a straddle is to profit from a very strong move, usually triggered by a newsworthy event, in either direction by the underlying asset. Traders may use a long straddle ahead of a news report, such as an earnings release, Fed action, the passage of a law, or the result of an election. They assume that the market is waiting for such an event, so trading is uncertain and in small ranges. At the event, all that pent-up bullishness or bearishness is unleashed, sending the underlying asset moving quickly. Of course, since the actual event’s result is unknown, the trader does not know whether to be bullish or bearish. Therefore, a long straddle is a logical strategy to profit from either outcome. But like any investment strategy, a long straddle also has its challenges.