Investment and Options Strategist
Summary: Markets have calmed after recent volatility, but uncertainty has not disappeared. For investors sitting on solid gains, this may be a moment to think about protecting portfolios with discipline rather than reacting later under pressure.
If you are sitting on solid gains, the hardest moments to think about protection are often the calm ones.
When markets are falling and headlines turn negative, protecting a portfolio feels obvious, even urgent. But by then, protection is often expensive and emotionally driven. When markets recover and volatility eases, protection feels unnecessary again — even though the underlying uncertainties may not have changed much.
That tension is exactly where many investors find themselves today.
Markets reacted positively after Davos. Volatility dropped, risk appetite returned, and the immediate sense of danger faded. The question for investors is not whether that relief was justified, but whether it means risks have disappeared.
The recent drop in volatility tells us one clear thing: investors are no longer expecting an immediate shock in the next day or two. That is a genuine improvement in sentiment.
What it does not tell us is that uncertainty has been resolved. Political decisions, policy direction, and valuation questions remain open. In other words, the market feels less afraid, but not necessarily more certain.
This distinction matters. Periods like this often produce markets that look stable on the surface, yet are prone to renewed swings when new information arrives.
For long-term investors, the challenge is rarely predicting the next market move. It is managing behaviour when conditions change.
After a strong run, many investors share the same concern: “I’ve made good progress, but I don’t want to give it all back if volatility returns.” At the same time, selling everything feels extreme, especially when markets are no longer panicking.
This is where protection becomes a planning decision rather than a reaction.
Importantly, calmer markets often offer a more favourable moment to put protection in place. When volatility is already elevated, protection tends to be expensive and rushed. When volatility has eased but uncertainty remains, protection can be structured more deliberately.
A practical way to approach protection is to start with a simple question:
Imagine you have made $100,000 in gains over the past year. Would you be comfortable giving back $10,000 of that? $30,000? More?
There is no universally correct answer. But once you choose a number, protection stops being abstract. It becomes a defined objective: limiting losses beyond a level you already decided was unacceptable.
Using options for protection does not mean buying insurance from an external provider. Protection is created directly in the options market and tailored to your investment horizon.
The most straightforward form of protection is buying a put option. A put gives you the right to sell your investment at a pre-agreed price for a limited time. If markets fall sharply, that right gains value and helps offset losses. If markets remain stable or rise, the put expires unused — similar to an insurance policy that was not needed.
Some investors prefer a variation known as a put spread. This focuses protection on a more typical market correction rather than extreme scenarios, which reduces cost. The trade-off is that protection does not extend indefinitely if markets fall much further.
In both cases, the purpose is the same: to define downside for a period of time, replacing uncertainty with a known range of outcomes.
Different investors solve this problem in different ways. Broadly speaking, there are three paths.
Some investors choose the simplest route: trimming positions, rebalancing, or increasing cash buffers. This immediately lowers risk, at the cost of reduced participation if markets continue higher.
This approach suits investors who prioritise capital preservation and prefer minimal complexity.
Others prefer to remain fully invested while setting a clear floor under potential losses for a limited period. Buying puts or put spreads allows this, at a known cost.
This approach suits investors who want clarity around downside without giving up upside participation.
For investors who are willing to give up some upside in exchange for lower protection costs, collars combine downside protection with an upside cap.
We covered the mechanics, trade-offs, and management of collars in detail in a previous article:
In the current environment, collars are best seen as a reference solution for investors who want defined downside while remaining invested.
These developments will influence whether today’s calm marks a new phase, or simply a pause.
Markets have relaxed, but they are not free of uncertainty. For investors who have built meaningful gains, this is often the moment when protection deserves consideration — not out of fear, but out of discipline.
Protection is not about predicting the next downturn. It is about deciding in advance how much you are willing to risk while waiting for clarity.
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