October is historically one of the most volatile months, but the range of volatility this past October is the smallest since 1964. Still, investors should have a hedging strategy even as stocks push to record highs, experts said at TheStreet's recent Financial Success Strategies event in New York.
"The first thing I tell people is with the VIX at [around 10.0], if you're just long equities and you're not hedging, you are a jerk," said Mark Sebastian, founder of OptionPit.com and contributor to Real Money Pro, a sister publication of TheStreet. "You should be taken out on the street and have your money taken from you because that is what's going to happen. And, if you've got a financial advisor that is working with you that is not implementing option strategies that advisor should be fired."
"You have to have a strategy at least for some sort of just-in-time hedge where if the market starts to really look ugly, you go in and buy," Sebastian continued.
Fellow panelist Skip Raschke, veteran trader and Real Money Pro contributor, noted that the last time he remembers seeing the VIX under 10 was August 1987 as the 1980s bull market was peaking.
"The last time I saw it under 10 I bought 700 puts," said Raschke. "I'll never forget it because by October of '87 what I bought for 50 cents I was selling for $11. That's per contract times a lot of them. Now, I didn't plan that. The reason I wanted it, all that downside, cheap gamma protection, was because I thought, 'Well, okay, maybe we'll keep going up and up and up.' We were going up for five years."
Raschke said it is "crazy" to not to own downside risk right now.
Sebastian recommended VIX futures as one of the best hedges against a widening base spread. "You can actually execute a VIX futures hedging strategy over the top of a bond portfolio and remove a lot of your base risks."
Tom White, director and chief strategist of TradeWise Advisors, a subsidiary of TD Ameritrade Holding Corp, (AMTD), suggested on the other hand that investors look at exchange traded funds (ETFs) to hedge an overall portfolio. With his clients, White said he looks at their portfolio and then "beta-weights it," which is a means for investors to put all of their positions together and correlate them to an index or an appropriate ETF. If long or bullish, one could buy put verticals for downside protection in an index such as the S&P 500, which is the market benchmark.
"If you're long a bunch of small caps in your account [and] you're domestically focused, you might consider buying some put verticals in January in something like [the iShares Russell 2000 Index] IWM with the VIX [near] 9-1/2," White said. "Because the VIX is [near] 9-1/2, which isn't an all-time low, but if you go to the individual implied volatility rates of some of these ETFs right now, those are at historical lows, so buying protection is really relatively cheap at this point."
Click here for more from TheStreet's Financial Success Strategies symposium.