Back in September of 2023, I wrote a post titled, “How To Prepare for a Recession” and it may have been very timely because it’s entirely possible by September of this year we will be in a recession. I followed up that post with another one a couple of weeks after titled, “It Feels Like 2007 All Over Again.“
With that in mind, I came across this article that discusses how there are half a trillion dollars in unrealized losses lurking in the banking system. The article references the quote below from FDIC.gov.
Unrealized losses on available-for-sale and held-to-maturity securities increased by $39 billion to $517 billion in the first quarter. Higher unrealized losses on residential mortgage-backed securities, resulting from higher mortgage rates in the first quarter, drove the overall increase. This is the ninth straight quarter of unusually high unrealized losses since the Federal Reserve began to raise interest rates in first quarter 2022.
Buying Stock Market Insurance
I don’t know if the stock market will crash, there is no real way to know that unless you have a time machine but what I can do is buy insurance in case the market crashes. In April, I wrote, “I’m Buying PUTS on the S&P 500” as an insurance policy.
The way option puts work is that they go up in value if the underlying instrument they are written against go down in value. In this case, I bought SPY puts that expire in September 2024. If the S&P 500 doesn’t crash by September then those puts will expire worthless. If the market does correct or crash then those puts will go up in value. How much they go up in value will depend on how hard the market corrects or crashes.
It’s important to remember that just like car or home insurance, the premiums you pay are “gone” after you make them. In the case your car crashes or your home burns down, you will get a pay out from the insurance company. If nothing happens to either, the insurance company gets to keep your money, you don’t get it back. The same holds true for put options, once the window for the event passes, you need to buy a new “policy” to insure those same S&P 500 stocks.
Hope For The Best, Plan For The Worst
I hope there is no major stock market crash but I have to plan for the worst so this is just me being financially pragmatic. Even if there is a severe correction or crash, things will eventually return to normal over time but that’s the catch. Why wait for the market to recover over a long period of time when I can get cash for my pain & suffering now?
Share The Wealth
What do you think? How are you preparing for a potential economic recession? Let me know in the comments below.