example portfolio 26, Syria Portfolio Protection

Syria cruise missileIf the U.S. military responds to the Syrian regime's alleged use of chemical weapons, what will the stock market's reaction be?

In a word: down.

Stock markets do not like military action. Especially in the Middle East. During a crisis, the rule is "sell first, ask questions later." Because no one knows how big the conflict could become or how long it could last.

Impact Of 9/11 Attacks

On September 11, 2001, the stock market did not open (the initial attacks occurred before the market was open). The markets remained closed until September 17. Although the stock exchanges were not damaged in the attacks, communications were thin or unavailable because of the telephone exchange damage near the World Trade Center. When the markets finally opened on September 17, the Dow Jones Industrial Average fell 684 points, or 7.1%. By the end of the week it had dropped 14.3%.

Cruise Missiles Are Different Than Homeland Terror Attacks, But...

Having the U.S. send cruise missiles into Syria is not the same as what happened on 9/11. However, the market's reaction to attacks on other countries has almost always been down. Here are some events and how long it took for the market to recover:

Event Date Number of Trading Days
For DJIA To Return To
Pre-Event Level
Invasion of France 12 May 1940 795
Pearl Harbor Attack 7 Dec 1941 232
Korean War 25 Jun 1950 57
Iraq Invades Kuwait 2 Aug 1990 134
9/11 Attacks 11 Sep 2001 40

What To Do Before The Action Begins

Today is an excellent time to increase cash positions and/or take defensive measures (buy some puts, or sell deeper in the money calls) before any military action takes place. If no action takes place, you can reinvest when it looks like the waters are calm again.

If There Is Military Action

The price of oil and gold are likely to increase with any military action in the Middle East. Auto and airline stocks are likely to decline due to higher fuel costs. Maybe buy some stocks that should benefit when oil or gold goes up in price:

Gold stocks: GLD, GG, KGC, NEM, ABX

Oil stocks: CVX, MUR, HES, TOT, OXY, BP, EC, RDS.B, IMO, XOM

Remember, those are not buy recommendations; they are just lists of symbols to start doing some more research on. If you put them into Born To Sell's covered call screener, here are some candidate trades to investigate further:

Gold covered call candidates for October 19, 2013, expiration with annualized returns of 12% or more (note the annualized returns include a dividend where it occurs):

Symbol Strike Net Debit Dividend Downside
Protection
Annualized Return
If Called
ABX 17 16.75 0.05 on Aug 28 18% 12.2%
GG 28 27.35 - 13% 16.2%
NEM 33 31.27 0.24 on Sep 3 6.3% 42.6%
GLD 131 129.49 - 5.1% 13.5%

Oil covered call candidates for September 21, 2013, expiration with annualized returns of 12% or more (note the annualized returns include a dividend where it occurs):

Symbol Strike Net Debit Dividend Downside
Protection
Annualized Return
If Called
HES 72.5 71.83 - 4.8% 12.6%
OXY 85 84.78 0.64 on Sep 6 3.9% 14.0%
HES 75 73.46 - 2.7% 29.5%
TOT 55 54.73 0.77 on Sep 19 2.1% 26.7%
OXY 87.5 86.38 0.64 on Sep 6 2.0% 28.1%
BP 41 40.56 - 2.0% 15.4%
XOM 87.5 86.06 - 1.2% 16.8%

Note that the TOT trade goes ex-div 2 days before option expiration. If there is little time premium left at that time you may find yourself subject to early exercise as the option holder tries to capture the dividend. If you don't want early exercise, then sell an October call instead of a September call.

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