This is what we prepared for…

Stocks have plummeted. The Dow Jones Industrial Average suffered its worst-ever point loss on Monday.

It’s impossible to predict events like the global spread of a deadly disease… the cause of the current crisis. But with the right strategy in place, you can hedge against unforeseen disaster – months in advance.

Just think back to what happened in December 2018… Back then, the S&P 500 Index plummeted by more than 300 points in the course of a month.

It fell roughly 20% from its October 2018 highs.

Most investors saw any gains for the year evaporate. Even David Einhorn – one of Wall Street’s more famous hedge-fund managers – saw his Greenlight Capital turn into one of the year’s worst performers… down 28% at the end of November.

Meanwhile, our Big Trade portfolio soared…

In November, we held 13 open positions with six winners for an average gain of 1%. By December, we were sitting on 10 winners for an average gain of 65%. Five were showing triple-digit gains.

Now, volatility is spiking again… handing us more triple-digit winners and the ability to offset some of our losses.

All this might sound beyond belief. But we’ve been waiting for the peak of this decadelong bull market. And in Stansberry’s Big Trade, we’ve used a key strategy to lock in our “portfolio insurance” before the next downswing…

The market is more volatile than it has been in years.

Gone are the days of 2017. Back then, the Volatility Index (“VIX”) – also known as the market’s “fear gauge” – was trading at sub-10 levels… all-time lows.

Now, the VIX is soaring. Investor panic is at multiyear highs – surpassing levels reached in 2008. Take a look…

The market has sold off sharply since the end of February. Investors are afraid of the coronavirus and the resulting slowdown in the economy.

But it can get much worse from here. That’s where this strategy comes in…

Our Big Trade strategy is all about intelligent use of speculation. We buy put options as a form of insurance to make leveraged bets against bad businesses – companies that are heavily indebted with poor prospects.

These are asymmetrical bets, meaning there’s disproportionate upside. A winning trade can pay many times more than the cost of a put option or a short recommendation.

Here’s how it works – and what it has to do with volatility…

Options traders use fancy terms like “Black-Scholes” and “implied volatility” when they talk about option prices. But trading options is really no different from other types of insurance.

A risky company will cost more to insure (using put options) than a conservative, blue-chip company. This price difference is called the “implied volatility.” Risky companies cost more to insure because the market expects them to have bigger price swings than more stable blue-chip companies.

Simply put, the VIX is actually a measure of implied volatility. It looks at options prices for all the stocks in the S&P 500. When the VIX is high – in the aftermath of a crash, for example – put prices on every company are up drastically.

Investors become desperate… and will pay a lot more for portfolio insurance. So a VIX level at more than 20 typically signals market fear, while a VIX level at less than 15 represents a calm market.

This is very important to understand. You see, times like today’s crisis are when our speculations pay off. The VIX stands at 76 as I write. These are hugely elevated levels – and they send our portfolio insurance skyrocketing.

We want to buy well ahead of panics like these… when volatility is low, and the market is pricing options as if there’s nothing wrong.

When the VIX is at less than 20, we’ve used those opportunities to build out a portfolio of cheap puts. Then, when the market finally wakes up and pushes the VIX higher, we take profits as the prices on the puts skyrocket.

We also recommend placing small bets across a diversified portfolio of companies. That limits our risk, but gives us plenty of upside. In other words, if an individual put expires worthless, it should be so small relative to your overall portfolio that it won’t hurt you.

And if we get a sell-off (like we’re seeing right now), the price of the put can soar triple digits… and help offset some of the losses you may experience in other parts of your portfolio.

We have started to see the benefits of these bets in recent weeks…

Since the end of February alone, we’ve closed four trades for gains of 227%, 137%, 126%, and 81%.

And this could be just the beginning of a volatile 2020.

There are other ways to hedge your portfolio – for instance, buying safe-haven assets like gold and taking short positions in troubled companies. But this is by far the best way to make truly outsized returns in a crisis.

If we see more losses from here, I hope you’ll have this strategy in place… helping your portfolio bear the brunt of the next market sell-off.

Good investing,

— Bill McGilton

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Source: Daily Wealth