How To Hedge Against Debt Ceiling Armageddon
Things are getting very tense on Wall Street, as Congress appears to be at an impasse with regard to raising the debt ceiling. Next week is likely to be filled with volatility and huge moves, the problem is figuring out whether we rally or there is a massive sell-off. The consensus is that a deal will get done over the weekend, and this would likely catalyze a relief rally in stocks.
The problem is that the downside is much steeper if no deal is reached than the upside if the politicians do come to an agreement. Fortunately, there are plenty of hedges that traders can put on to protect themselves against a calamity in the stock market. If you don't want to sell your long positions in stocks, consider these hedging options:
Buy Gold And Silver - Investors should have exposure to precious metals heading into this weekend. This can be done in numerous different ways. The most straightforward would be buying the SPDR Gold Trust ETF (NYSE: GLD) or the iShares Silver Trust ETF (NYSE: SLV). Investors could also consider buying calls on these ETFs, buying gold and silver futures outright or buying call options on gold and silver futures contracts. If no deal is reached over the weekend, expect to see the price of precious metals shoot up again on Monday.
Short Treasuries - The Treasury market appears to be grossly mis-priced as a result of concerns over growth, which are legitimate, but also because of the Fed's massive bond buying programs and ZIRP policy. If no debt deal is reached, yield should move violently higher as big players rush for the exit at the same time in the Treasury market. Consider buying the ProShares Ultrashort 20+ Year Treasury ETF (NYSE: TBT) or call options on the security as a hedge.
Buy Volatility - The VIX is rising ahead of this weekend, and at last check it was trading up more than 8% to 25.68. Investors could gain exposure to a rising VIX in a number of different ways. The index normally moves inversely to the S&P 500, so if stocks fall next week the VIX should continue to rally. Consider buying VIX futures, or calls on VIX futures. Traders who prefer ETFs could buy the iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) heading into next week. Option contracts can also be purchased on the VXX.
Buy Leveraged ETFs - Traders who don't want to sell out of their positions, but are looking to reduce exposure to the stock market could purchase inverse ETFs to protect against a market decline. Popular trading vehicles would include the ProShares UltraShort QQQ ETF (NYSE: QID), the ProShares UltraShort S&P 500 ETF (NYSE: SDS), and the ProShares UltraShort Russell 2000 ETF (NYSE: TWM).
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