How to Score With a Defensive Options Play

Although earnings for technology stocks are looking better, it appears as though a defensive posture is going to be needed in this market heading into the fall.

Why is the fall disconcerting? Because many companies are expecting slowdowns into year-end, and even though earnings look good now, the perception of lower earnings in the future could affect stocks today. And then there's that "October Witch Project." The month traditionally hasn't been a good one for investors, who might make it a self-fulfilling prophesy, moving stocks down, and options premiums up, mostly out of fear of history repeating itself. These factors, along with pervasive levels of uncertainty in the markets, are causing many investors to look for hedging strategies to reduce risk.

We all know the products Anheuser-Busch (BUD Quote) makes. If you take a look at the price chart of the company and compare it to the Nasdaq Composite, you'll notice that the two charts move in opposite directions. When the Nasdaq's going down, Bud's usually heading higher.

The Bud-Nasdaq Factor When one's going up, the other goes down

This type of negative correlation has been occurring almost 80% of the time this year, up from 55% of the time last year. Dates to take note of include Bud's low in late March, which corresponded to the Nasdaq's 52-week high. The end of May saw the Nasdaq getting dangerously close to a 3000 low; Bud was experiencing its own 52-week high the same day.

Bud has been in an uptrend since the beginning of April. And if it continues going up, based on history, technology stocks should keep falling. That makes it more of a defensive stock and knowing how it moves in relationship to the Nasdaq can help you create a trade that profits from continued weakness in the tech sector. Other stocks that follow this pattern of moving opposite the tech stocks include Ford (F Quote), Pfizer (PFE Quote) and MGM Grand (MGM Quote).

All of these stocks are in sectors that perform opposite to the tech sector and have low volatility levels that result in lower options prices. That means that simply buying long-term call options may work quite well as a hedge into October.

Safe and simple -- just what investors should be looking for.