Syria Portfolio Protection

by Mike Scanlin

Syria cruise missile If 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.

Mike Scanlin is the founder of Born To Sell and has been writing covered calls for a long time.

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