Here's How You Can Build A Plunge Protection Portfolio

We spent the weekend looking at deep out of the money puts, as potential hedges to be purchases against a potential market pull-back.

As buying put protection against U.S. financial stocks is the most obvious choice right now given Goldman travails, for The Money Game we’ve pulled out some select names that weren’t simply AIG (AIG), Citi (C), or GE (GE) (even though they have interesting options as well).

Below are select companies that have rallied hard, but at the same time could fall faster than the rest of the market in a downturn due to the levered nature of their businesses to the economy. We tried to look for where deep out of the money put protection can be bought for relatively cheap, thus these are hedges for a true market rout. They are most likely to expire worthless, but could pay off handsomely if things get really ugly. These are all just examples, and nothing more.

The first is a real estate investment trust, Developers Diversified Realty, that could be slammed, below. Note that MC = Market capitalisation, EV = Enterprise Value (market cap + debt), and all prices shown will probably, or already have, changed a bit.

For example, as shown below, you can buy $10.00 January 11th puts for about $0.80, which will become valuable should Developers Diversified Realty breach its February 2010 stock price levels. Or you could pay $0.30 for $7.50 puts that are in the money if DDR falls back to September 2009 levels.


Next a company with substantial debt, and has rallied hard, that makes its money from people spending frivolously. For about $1.75 you can buy a hedge that becomes ‘in the money’ should Royal Caribbean breach February 2010 price levels:


Also, Vale, the huge Brazilian iron ore producer would be a good hedge against a China slow-down. Note the stock is still near recent highs, so you aren’t ‘too late’. You can buy $25 puts that are in the money should Vale fall back to just February 2010 levels:


Caterpillar is another potential hedge against a China slow-down. $50 puts could become very profitable if Caterpillar drops to February 2010 levels.


These are just select examples, there are tons of opportunities like this given how hard some stocks have rallied since February of this year.

Don’t miss: Citi: Why earnings will blow away expectations this quarter >

Note: The author owns shares of AIG and GE. Investors the author speaks to could own stocks or options related to any of the companies above. None of the information here is necessarily accurate and everyone should do their own due diligence. These are just leads, not investment recommendations.

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