If Tuesday’s market sell-off was a sign of things to come, there are ways for investors to protect themselves or even profit off of future pullbacks without shifting into cash. John Marshall of the Goldman Sachs derivatives research team said in a note to clients Wednesday that buying put options on stocks that are likely to fall more than the broader market during a downturn could help lessen the blow for investors. Put options give investors the right to sell a stock at a predetermined strike price, and the trade works when shares fall below that price. Those options could be relatively cheap right now for some of the more vulnerable stocks, according to Goldman. “During normal market environments, the options market prices options efficiently based on trailing realized volatility. In periods of market pullbacks, these quantitative methods tend to break down as fundamentals take on increased importance. Our long-term studies have shown that Free Cash Flow is the most important fundamental metric to watch when estimating downside asymmetry,” Marshall said in the note. To identify put option candidates, Goldman found stocks trading above the firm’s price targets and low or negative free cash flow. “We view puts on these stocks as attractive to buy for a pullback in equities,” Marshall said. One big name on the list is Southwest Airlines . The airline industry requires heavy capital spending, and Southwest’s cash pile declined by $200 million last year after its dividend payments. Still, the stock has rallied more than 50% since the start of November. LUV 6M mountain Shares of Southwest Airlines have rebounded over the past four months. Another consumer-facing stock that could face cash flow issues is Foot Locker . The company reported having $187 million in cash and cash equivalents at the end the third quarter, down more than 40% from the same period a year earlier. Tech companies are also heavily represented on the list, though it isn’t just money-losing…
2024-02-18 09:14:00
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