Hedging downside risk has been crucial for investors this year as the market continues to suffer wild swings, and here’s how professional traders are protecting their portfolios. A group of traders and strategists joined CNBC’s Dominic Chu Thursday in the final hour of trading for the new instructive online program “The Tick,” which is designed to show retail investors what the pros are doing. Katie Stockton, founder of Fairlead Strategies, said investors could look at volatility products as a way to hedge their long positions in the bumpy market right now. “We have a situation in which volatility has gotten somewhat depressed, and here with the relief rally in the major indices,” Stockton said. ” We don’t want to take any false sense … of complacency in that because we have seen this kind of action give way to a volatility event.” The stock market has been on a roller coaster this year as the Federal Reserve aggressively hiked rates and fight inflation running at the fastest pace since the early 1980s. The S & P 500 fell into a bear market, and today stands about 15% lower on the year. For investors who want to hold their long-term core positions like Apple , they could hedge risks by either reducing exposure through inverse ETFs or getting some volatility exposure, Stockton said. She said she’s been recommending the ProShares VIX Short-Term Futures ETF (VIXY) , which will rise in value with increased volatility. Samantha LaDuc of LaDuc Trading said that she added a few positions for downside protection recently. The Dow Jones Industrial Average has been a relative outperformer to the Nasdaq Composite as investors favored cyclical names over growth tech stocks. Meanwhile, the energy sector has been a standout winner this year with the Energy Select Sector SPDR Fund (XLE) rallying more than 60%. To position for a potential decline in these winning pockets of the market, LaDuc initiated put options against the SPDR Dow Jones Industrial Average ETF (DIA) and XLE. A put option gives an investor the right to sell an asset at a specified price by a particular date. Stephen Kalayjian of TradeEZ, who teaches thousands of clients trading in 100 countries, said he believes that stocks are still in a bear market, and he advised against buying for the long term. “In my 40 years of experience, bear market rallies are more vicious than bull market rallies,” Kalayjian said. “I think this is a tradable market right now. And to buy in and hold here is really very risky.”
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