Put Options
Most large and liquid ETFs also have an active market for call and put options. And a put options strategy offers another excellent way to manage stock market volatility.
Let’s suppose an investor owns 1,000 shares in the SPDR Dow Jones Industrial Average ETF (DIA). This would equate to a rough dollar value of $362,000. How could they protect the value of that investment? One way would be to guard their DIA stake by purchasing 10 DIA put options with the expiration date of their choice. This would allow them to customize the length of insurance on their DIA holding.
Keep in mind: Put options that are far off into the future will cost more than those with shorter expirations of a few weeks or months. So advisors and their clients must balance the need for protection with the cost of protection.
Summary
ETFs provide both advisors and their clients with lots of flexibility. This is especially true when it comes to protecting the value of investment portfolios during turbulent times.